One Tweak That Can (Instantly) Add Millions To The
Value Of Your Business
If
you’re trying to figure out what your business might be worth, it’s helpful to
consider what acquirers are paying for companies like yours these days.
A
little internet research will probably reveal that a business like yours trades
for a multiple of your pre-tax profit, which is Sellers Discretionary Earnings
(SDE) for a small business and Earnings Before Interest Taxes, Depreciation and
Amortization (EBITDA) for a slightly larger business.
Obsessing Over Your Multiple
This
multiple can transfix entrepreneurs. Many owners want to know their multiple
and how they can jack it up. After all, if your business has $500,000 in
profit, and it trades for four times profit, it’s worth $2 million; if the same
business trades for eight times profit, it’s worth $4 million.
Obviously,
your multiple will have a profound impact on the haul you take from the sale of
your business, but there is another number worthy of your consideration as
well: the number your multiple is multiplying.
How Profitability Is Open To
Interpretation
Most
entrepreneurs think of profit as an objective measure, calculated by an
accountant, but when it comes to the sale of your business, profit is far from
objective. Your profit will go through a set of “adjustments” designed to
estimate how profitable your business will be under a new owner.
This
process of adjusting—and how you defend these adjustments to an acquirer—is
where you can dramatically spike your company’s value.
Let’s take a simple example
to illustrate. Imagine you run a company with $3 million in revenue and you pay
yourself a salary of $200,000 a year. Further, let’s assume you could get a
competent manager to run your business as a division of an acquirer for
$100,000 per year. You could safely make the case to an acquirer that under
their ownership, your business would generate an extra $100,000 in profit. If
they are paying you five times profit for your business, that one adjustment
has the potential to earn you an extra $500,000.
You should be able to make
a case for several adjustments that will boost your profit and, by extension,
the value of your business. This is more art than science, and you need to be
prepared to defend your case for each adjustment. It is important that you make
a good case for how profitable your business will be in the hands of an
acquirer.
Some of the most common
adjustments relate to rent (common if you own the building your company
operates from and your company is paying higher-than-market rent), start–up
costs, one-off lawsuits or insurance claims and one-time professional services
fees.
Your multiple is important,
but the subjective art of adjusting your EBITDA is where a lot of extra money
can be made when selling your business.
*** Richard Kranitz (Wisconsin) is an experienced attorney and business consultant in the areas of corporate, securities and tax planning for corporations, partnerships, joint ventures, limited liability companies, multi-unit enterprises, and a variety of different non-profit entities. In addition, he has counseled their owners and executives in compensation planning, estate plans, and asset protection. Attorney profile at: https://solomonlawguild.com/richard-a-kranitz-esq
