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Trent Lee is consistently the #1 ranked Business Broker in the nation for the First Choice Business Brokerage Franchise.
I meet with business owners every day who have spent years, even decades, building their businesses with the hopes of one day selling and retiring. However, many of them have spent next to no time understanding how business valuations work and what they can do to proactively increase their business valuation.
These five tips will help you not only increase the value of your business, but also ensure you’re ready when the time arrives to find a buyer.
1. Clean up your financials.
If you do anything this year, make sure you stop running personal expenses through the business in order to get as many tax write-offs as possible to lower your taxable income. When a business valuation analyst comes in to review your financials, they will “recast” the financials, meaning they will identify any personal expenses and/or one-time expenses and add them back to the bottom line. However, banks often will not accept many of these “add backs,” thus lowering your seller discretionary earnings (SDE).
This has a major impact on not only the value of the business, but also the debt-service ratio and metrics that the bank will be looking at to determine if net profit can provide a livable wage to the owner and family, in addition to safely making the monthly debt servicing payment required for underwriting compliance.
Think of it this way: If you run $10,000 of personal expenses through your business, thus lowering your SDE (seller discretionary earnings), you’ll get some savings off your taxes. However, if you are hoping to sell your business for three times SDE (the approximate national average in Q3 of 2019, according to Bizbuysell.com) that $10,000 cost you $30,000 off the fair market value of your company. Is the tax savings on that $10,000 really worth it?
2. Diversify your revenue.
What’s the most dangerous number in business? One. One source of revenue makes buyers nervous. If you have multiple services, multiple products or multiple sources of revenue, it provides some assurance to the buyer, even if it’s only perceived assurance, that there is stability if any one service offering or product were to be discontinued or disrupted.
The same goes for vendors, customers or contracts. If your company is generating more than 25% of its gross revenue from one source, it puts your business at much higher risk. Future buyers want to see that revenue is growing year over year, but they want to see diversified revenue growth.