A business owner recently asked me what she could do to increase the value of her business. She wants to sell and retire in a few years.
My advice was:
- It is easier to sell big businesses than small businesses. The magic number is $1 million in adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization). When a business has more than $1 million EBITDA, it becomes attractive to all buyer types: individuals, strategic buyers, and Private Equity Groups. By the way, $2 million in EBITDA is even better.
- to be attractive for sale, a small business needs to make enough money to support a working owner in that geography. So, if a new owner requires $150K/year in salary, wages, perks, and draws to support themselves and their family, the business needs to be more profitable than that. Below that threshold, a small business just isn’t attractive.
- ideally a business can operate and continue to grow without the owner involved every day. That way a new owner can step in without needing any special skills or training. Or a strategic acquirer may be able to integrate the business without hiring a general manager. You still should be running the show. When you are present, the company will run better. But…operationally it should have all the pieces in place to run without you. I advise business owners who want to sell in a few years to start taking more vacations. That forces them to make their business able to operate day-to-day without them.
- a key to making a small business attractive to buyers is to have a reliable lead/prospect/customer engine. A good business development engine systematically identifies leads and converts them into prospects and customers. The front end of the engine/funnel could be advertising. It could be prospecting. It could be networking. Ideally, this engine will have the resources to work with and without you, the owner, at the business every day. Steady customer flow is the lifeblood of small businesses.
- of prime importance is to determine the products or services at which your business excels, and focus on those products and services. Knowing your focus will help you design your company’s business generation engine. It seems counter-intuitive, but it is easier to sell a specific product in a smaller market segment than a wide array of products into a larger market segment. Of course, the market segment you choose has to be big enough. A great lead/prospect/customer engine will help your business garners more than its fair share.
- Growth is important. An attractive business is growing steadily and sustainably. Both top line and bottom line should increase predictably. A consistently growing company will sell at a higher multiple than a company with flat or declining sales.
- Paramount is profitability and cash flow. A profitable business is attractive. Cash flow is always king.
Essentially, I advised this owner to pursue business excellence and grow her business to make it attractive to as many types of buyers as possible. If you are considering selling your business one day, this may be good advice for you.
Roy Martinez is a business intermediary with Exit Strategies Group, a leading California-based M&A advisory firm with almost two decades of experience selling small-to-medium-sized and lower middle market businesses. For further information, or to discuss a potential sale or acquisition, confidentially, contact Roy Martinez at 707-781-8583. This post was adapted from Roy’s response to a question from a Sonoma County small business owner.