As I spoke before in my valuation blog post, most small businesses trade for an average of 2 times Seller’s Discretionary Earnings (SDE), but there is a range (1-3). And there are ways to increase the value of your business. As our Podcast, The Deal Board, speaks about the quality and quantity of your earnings will drive the multiple paid on your business and ultimately the final purchase price. Here are three ways that we’ve found that can help drive both the quality of earnings and help increase the value of your business.
1. Financial Statements and Controls
Financial Statements are crucial in a deal to determine the quality of your earnings. Having good, up to date books and records is not just a driver in increasing the value of your business, but an indicator if your business will sell or not. Statistically, only 20% of businesses listed for sale actually do sell! If you want to be in that 20% buyers will want to see clean books and records including profit and loss statements, balance sheets, and tax returns.
2. Owner Transfer Process
Is the business — and are you — ready to transfer the business? What roles do you play in the business that are essential to day-to-day operations? Those roles and tasks should be documented and transferrable to a new owner. Also, consider if you are emotionally ready for the sale of the business. Selling a business is an emotional and hard process, it will take a lot of work and effort even with the right team in place.
3. Deal Structure
A deal is about more than the final purchase price. Packaging a deal correctly for the market can increase the purchase price and the feasibility of finding a buyer. This includes pre-qualification from a lender, offering seller financing, and having an adequate training and transition period.
When you are preparing to sell your business and looking to get the best value possible, these three items are essential to address before a sale. Although there are many more that we address in our Prep to Sell program, focusing on these three alone can take a few months of work. To dive deeper into these three business drivers, download our free course — Three Drivers of Business Value, and continue to build your business. Valuations and multiples are driven by the quality and quantity of your earnings as a business.