Clients come to us to help them sell their business for top dollar for many different reasons. Some are ready to live free from the time and pressure demands of the company. Others want a lump sum of cash to move on to the next adventure or into retirement. While others see the market shifting and would rather sell high than sit on the business and hope the market doesn’t crash anytime soon. Ready to decide if you should sell your business and retire?
Unfortunately, it’s not as easy as slapping a “For Sale” sign on the front door and watching the offers roll in. Most business owners need up to a three-year head start to plan their strategic and profitable exit.
However, if you’re thinking about selling your business, there are three things to consider before making your decision.
Do you have a 3-year budget or growth plan?
Building a 3-year budget or business plan to show how your business will grow in the short term is one of the most important steps you can take toward selling. A budget is an estimation of expenses and income over a certain period of time. It allows a business to plan out expenses, reach revenue goals, and anticipate operational changes.
It also helps a business understand its operating costs and can be used to track performance. By mapping your spending, you can anticipate the months that will generate surplus revenues and those in deficit.
Your budget or business growth plan should include the following three documents –
- Profit & Loss Statement
- Balance Sheet
- Cash Flow Budget
P&L Statement, also known as an “income statement,” helps you understand what’s behind a company’s profitability by detailing income and expenses over a specific period. It shows a company’s revenue minus its expenses for running the business, such as rent, cost of goods, and payroll.
The Balance Sheet shows the final position of the assets, liabilities, and equity for a given period. It’s a snapshot of your financial situation at a given time.
The Cash Flow Budget shows how much money is available in a given period. It helps determine if you have enough cash to maintain regular operations.
Is your debt-to-income ratio low and attractive, or high and a red flag?
The debt-to-equity ratio, or risk ratio, is a financial liquidity ratio that compares a company’s total debt to its equity. It shows the percentage of financing the company receives from creditors and investors.
A company whose total liabilities are equal to its shareholder’s equity will have a debt-to-equity ratio of 1.0. A company whose liabilities are twice its shareholder’s equity level will have a ratio of 2.0. Simply put, a company having more owned capital than borrowed capital generally has a low debt-to-equity ratio.
A high debt-to-equity ratio is frequently associated with high risk. It indicates that a company has used debt to fund its expansion. Debt-to-equity ratios vary by industry and are best used to compare direct competitors or to measure the change in the company’s reliance on debt over time.
The formula for the Debt to Equity Ratio is:
Debt to Equity Ratio = Total Liabilities / Shareholder’s Equity
Know your worth
There are several methods for valuing a small business. Each method has its pros and cons and can be used in different circumstances. Would you like to establish what your business is worth so you can decide on a selling price?
The quickest, easiest, and most effective way to do this is to use a method called the EBITDA method. It’s the simplest.
Again, EBITDA is an acronym that stands for earnings before interest, taxes, depreciation, and amortization. It serves as a metric for selling a business. It helps the seller and buyer determine the business’s standard value.
To calculate EBITDA, use this formula:
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
EBITDA calculation is merely the first step. It is a key part of the overall company valuation, but it does not give the full picture of a company’s financial health.
Lastly – But Most Importantly – Get Support
If you’re wondering –
“What are the steps to selling my business? For that matter – what’s the first step?” “Who’s going to buy my business?”
“How do I get the right price?”
“What can I expect to pay in lawyer fees?”
“How can I avoid being undervalued?”
“Can I scale now to increase the value?”
I invite you to join The ENDGAME Program.
Selling your business is one of the most important transactions you’ll ever make.
This program empowers business owners in any stage of growth to make the process easy, fulfilling, and successful.
Plus, for a very limited time, I’m offering the entire program for a savings of $500.
If you own a business, you hope to sell for a massive profit someday; then it’s time to shift your BIG dream of being a successful entrepreneur to enjoying a highly profitable exit (And you know what?… With The ENDGAME Program, you don’t have to waste thousands of dollars on brokerage commissions or stay stuck wondering the best way to move forward).