Understanding the Odds of Selling a Business
When it comes to buying or selling a business, we often get asked two common questions: “How many businesses are for sale?” and “What percentage of businesses on the market actually sell?”
To get a sense of the market, it’s important to break things down by business category. The industries that make up the majority of small to mid-sized business sales include: manufacturing, wholesale trade, retail trade, business and personal services, and household/miscellaneous services. Together, these sectors represent a significant portion of the approximately 30 million businesses in the U.S.
It’s commonly estimated that around 15-20% of small businesses are for sale at any given time, though this figure can vary depending on market conditions. Interestingly, smaller businesses—especially those with fewer than four employees—make up a larger portion of the businesses on the market. However, it’s generally observed that the sale success rates for smaller businesses tend to be lower than for larger ones. Smaller businesses, especially those with fewer than five employees, are often seen as having more challenges, such as incomplete financial records or unrealistic pricing, which can affect their chances of a successful sale.
So why do smaller businesses struggle to sell at the same rate as larger ones? Several factors come into play. Smaller businesses often face challenges like inaccurate financial records or unrealistic pricing. Some owners may not be fully committed to selling or may not be prepared for the complexities of the sales process. In some cases, owners might simply close their doors rather than attempt to sell.
Another key reason small businesses often struggle to sell is that their owners may not be properly prepared for the sale process. Many business owners, especially those with fewer than five employees, fail to plan ahead for the sale. This lack of preparation can include everything from neglecting to update financial statements and resolve legal issues to failing to optimize the business for sale by streamlining operations. If a potential buyer sees these areas as red flags, they might walk away, even if the asking price is reasonable.
To improve the odds of a successful sale, business owners should take a few proactive steps. First, they should invest time in cleaning up their financial records, ensuring that they are transparent and up-to-date. It’s also wise to engage a professional who can provide expert advice, market insight, and help with valuation. Additionally, business owners should focus on making their business more attractive to potential buyers by demonstrating a stable, profitable operation with room for growth. Taking these steps can significantly improve a business’s chances of selling successfully.
Copyright: Business Brokerage Press, Inc.
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Don’t Settle for Less Than a Highly Accurate EBITDA
If you, as the seller, want to receive the best price for your business, it’s essential to understand that your adjusted or normalized EBITDA will serve as the foundation for the purchase price. This EBITDA will be used as a multiple to negotiate the final price. Every dollar counts; for example, if your EBITDA is off by $50,000 and the multiple is three, the final acquisition cost of your business is reduced by a significant $150,000. In short, these multiples matter, underscoring the critical importance of reaching an accurate EBITDA for your business.
Let’s explore a couple of common EBITDA adjustments that sellers should be aware of. One adjustment may come from a one-time event, such as an insurance settlement, legal expenses, or PPP loan forgiveness. Unusual expenses associated with the growth of the business can affect the adjusted EBITDA. Another factor is the conversion based on GAAP accounting, which can vary widely.
Balance sheets are crucial when it comes time to outline the financial health of a business. It is common for smaller businesses to focus solely on profit, often neglecting to review their balance sheets as frequently. Balance sheets should be presented clearly, allowing potential buyers to understand the true assets and liabilities involved in the sale. It is best to be upfront with this information to prevent any surprises during due diligence.
At the end of the day, business owners should keep three important points in mind when preparing to sell their business. First, consider having a Quality of Earnings analysis performed. This will provide a clear understanding of your business’s health. Second, ensure that your key managers and employees are prepared and capable of running the business during the transition period. Third, take all necessary steps to review your financials, and be ready for GAAP reporting requirements during due diligence.
Importantly, sellers should not cut corners on any of these three points, as all are vital to the successful sale of your business. It’s important to note that selling a business is not a one-dimensional process; it encompasses many different aspects. Business brokers and M&A advisors are critical to the process, as they understand what it takes to defend an EBITDA. This helps to ensure that sellers receive the right price for their business.
Copyright: Business Brokerage Press, Inc.
The post Don’t Settle for Less Than a Highly Accurate EBITDA appeared first on Deal Studio.