How Much Is Your Business Worth?

Do you know how much your business is worth?

Did you know that business owners typically need about 3-5 years to prepare their business for sale, and it can take up to a year to actually sell a business? In general, business owners are normally not educated about the process and what is important for them to do in the years leading up to a transition of ownership.

So what are you to do if you want to be in a position to sell your business?

Listen in as Jennifer interviews Cheryl Venezia from Murphy Business Sales of Madison where they talk about ways that you can start preparing your business for a possible exit in a few years from now and what steps you should be taking immediately if this is even a remote possibility.

Transcript (auto-generated; may contain errors)

Speaker 1 (00:01)
Hello and welcome to another episode of MOJO: The Meaning of Life & Business.

(00:06)
On today’s program, we’re going to be talking about selling your business and getting an idea of what your business is actually worth.

(00:16)
All too often, a lot of business owners or entrepreneurs go into a business and they’re only thinking about selling this widget or that widget, whatever it is, but they’re not actually doing more in terms of what they can do. Now, here’s the issue that comes with that. You’re only focused on what you’re doing in your business, you’re not planning really for the future.

(00:43)
And so on today’s program, I’ve got an incredible guest that’s going to help us understand what it means to be getting even more value out of our business and what we can do in terms of thinking long term of our business. But before I bring our guest on, let me tell you a little bit about her so you understand why it’s so important that she’s here talking about this topic today. Cheryl Venezia has spent her early career working in public accounting, performing audits of large public companies. She then worked for almost 30 years at UBS PaineWebber, working internally as an accountant within its various divisions.

Speaker 1 (01:24)
Cheryl then decided to become a business broker in order to use her financial and interpersonal skills to help others achieve their goals.

(01:33)
Cheryl, welcome to the program.

Speaker 2 (01:35)
Thank you, Jennifer. It’s a pleasure to be here speaking with you today.

Speaker 1 (01:39)
Absolutely. Thank you.

(01:41)
Cheryl, let me ask you, as any entrepreneur in business, sometimes we get this idea that we want to get a million dollars for our business and we want to get a million dollars in revenue for our business. A lot of us sometimes forget exactly what that means, though. So help me understand, before we talk about selling a business, what does valuing the business actually mean and what are some of the things that we need to take into account as we do value our businesses?

Speaker 2 (02:18)
That’s a great question and a great point for business owners to be aware of. The value of a business is really based off of several components. And the key is the financial performance of the business. So we say in the business brokerage industry, buyers will pay for performance they buy for potential. I hear so often that business owners say my business is worth so much more than what I show in my financials because there’s so much potential that hasn’t been tapped yet. And that could very well be true. But buyers aren’t going to pay hard dollars for it. It’s going to make them want to be interested to buy the business. It’ll be the incentive for them to want to be interested. The second component that’s so important is in focusing on those financial performance that you show a positive trend over the last three years. It’s going to be in a more difficult position. It’s not going to be impossible, but it’s more difficult to sell a business when it’s in a declining trend. So you want to really take advantage of the upswings in your performance. And the third thing that’s important is to know your industry and what the relative comps are of business sales.

Speaker 2 (03:44)
And that’s when you get into multiple. A lot of people talk about wanting to sell their business for multiple of revenue. That’s generally not how it works. It’s a multiple of bottom line. With some adjustments made. It’s generally sold for a percentage of revenue. So if you’re aiming to get that million dollars sales Mark, top line revenue, you’re not going to sell for a multiple of that number. It’s how well do you manage your financial position to your bottom line impact? And it’s the multiple of that that’s going to be the most important. So those will be the three things.

Speaker 1 (04:27)
Absolutely. And so think about for those of you that know the show, Shark Tank, Dragons Den or the other kind of programs that are similar, it’s really important because you always hear the investors, the Sharks, the Dragons, whatever you want to call them, always going back at the entrepreneur and saying you’re asking for 16 times your revenue in an industry that’s just unrealistic to be getting that for an investment, or you have to be thinking more realistic in terms of what you can get. And so you really want to think about that valuation. Like Cheryl was just saying, with those three points to consider, as you’re looking at where you’re going with the valuation and as Cheryl also stated, you need to make sure that you’re really clear in having three years of positive growth in the business, because if you do have that declining growth, anyone who’s looking at investing and or buying your business may not be happy buying a failing business. So, Cheryl, let me ask you, though, when we’re looking at the performance of a business, are we looking at the overall gross profit of business? Are we looking at the net profit? Are we looking at accounts receivable still in terms of what’s coming in and what’s obviously, therefore not been paid yet?

Speaker 1 (06:00)
How is that impacting a business’s overall valuation that any of our listeners may be in a position to think about? What do they need to do to really start boosting that value if at some point down the road they want to ultimately get that investor and or sell their business?

Speaker 2 (06:26)
Yeah. Another great point, Jennifer. So we start with tax returns. So we look at the business’s tax returns for the last three years. That is the official records of the business. And anybody looking to buy a business, that’s what they’re going to want to look at if they get to a due diligence point. So when we’re working with business owners and doing valuations, we ask for the tax returns right up front. And so those tax returns have all of that information on it. Gross revenues, cost of goods sold if it’s included operating expenses of the business and then net income. We do make adjustments to that P&L to come to a number that in the industry is called sellers discretionary earnings. And what does that mean? It means we take that financial performance and we add back certain expenses. We always add back non-cash flow items such as amortization depreciation and interest and other discretionary items that a seller decides, for instance, an interest. We add that back because one owner might finance a business differently than another owner. We always add back owner salary because an owner can decide how to pay themselves. And there are other discretionary items that a business owner might take advantage of by running them through their PNL that we want to add it back and really get to the true picture of what are the results from business operations for that business in terms of the balance sheet, we also looked at the balance sheet.

Speaker 2 (08:18)
And what are the receivables? What are the payables? In many cases, the receivables and payables stay with the business owner. So after a transaction is completed, the owner would be responsible for continuing to collect against the revenues that they generated from when they owned the business. There are times, though, that the new owner might buy the receivables, so it depends on the size of the transaction and the different elements that are involved. I’ve seen it done both ways, but it is something to take into account. And then there’s also inventory. So some inventory might be included in the valuation in terms of the multiples. And sometimes inventory gets added on on top of it. Many times what we would say is we would pick a minimum inventory value and say, this is how much is included in the sale. Maybe it’s $50,000 worth of inventory. And if at closing inventory was more than $50,000, then the new owner would have to pay that difference at settlement. So there’s many different ways to handle some of this, but generally it is based off of that SCE number. Revenues and SDE are kind of the two PNL metrics that are so important in terms of determining the valuation and then getting those multiples and percentages out of comparable business sales to apply to your business’s financial results.

Speaker 2 (10:00)
And that’s how you really come up with the value.

Speaker 1 (10:04)
So, Cheryl, you used an acronym of SDE. I just want to make sure that our listeners, again, are clear.

Speaker 2 (10:11)
SDE stands for Sellers Discretionary Earning.

Speaker 1 (10:17)
Thank you. So again, SDE, Sellers Discretionary Earnings. So if you do hear that again, you’ll know exactly what we’re talking about.

(10:26)
So, Cheryl, let me ask another question. As it relates to intellectual property and the personal connection of clients to owners, because that becomes an issue for a lot of business owners. Right. They’re looking at potentially selling a business. Some clients are going to stay with the business only because of the business owner and others are staying with the business because it’s a business like any other. And then there are other aspects of the business of intellectual property. So in those two areas, how are those areas taken into account as it relates to the valuation of a business and the ability for a business to ultimately get an investor and or a buyer?

Speaker 2 (11:22)
So smaller businesses where it’s a solopreneur and there aren’t any employees, there’s no hard assets necessarily that might be coming with it. And it’s really a services-based business that relies on the owner. Those are very difficult to sell because that’s just it. The business is centered around the owner. In addition to financial performance, we do encourage our business owners to make sure that they are not the core center of any business because there is risk involved in any business transaction. And the buyers risk is that they might lose customers, as you point out, because the owner is now not part of that entity going forward. So it’s very important for business owners as they’re preparing for a sale to try to extricate themselves from the core of the business, hire managers, put key employees in place who can perform and do the things that maybe they’re doing via business development, sales generation, or some of the back office accounting, employee management, order management, what have you. So that would be a very key recommendation. And businesses that don’t do that don’t get as high as multiple. They just won’t sell for as high as a multiple as part of any business transaction.

Speaker 2 (13:03)
Also, I want to point out that when someone purchased a business, the owner is pretty much obligated to stay on for a transition period. And that’s part of the purchase price. Generally speaking, it’s about a month. So it’s expected that post closing, the owner will stay on for about a month to help transition and train introduce the new owner to the employees, the clients and the vendors, and get them trained up so that they can move on to be successful. If a buyer wants an owner to stay on for longer than that, then you have to come up with a mutually agreed consulting agreement where you would get paid for your time. But generally speaking, the purchase of the business kind of comes with that training built into it.

Speaker 1 (13:55)
And what about intellectual property? How is that valued into the valuation and a business sale investment?

Speaker 2 (14:04)
So if you’re talking about intellectual property, such as patents or original content and thought there is a way for us to consult with experts to get a value on a patent. But the other intellectual property, as you’re talking about it really translates into the goodwill of the business. And if you go back to the tax returns and we look at the PNLs and we look at the balance sheet, you might have assets of the business that are, for example, worth a hundred thousand dollars might be inventory, it might be trucks and equipment, what have you. And then you might sell the business for maybe $200,000. The difference between the sale price and the asset value is what we call goodwill. And it’s what the owner has built up in the business to make it more valuable than the assets that they have on their balance sheet. And that’s how that really translates into the sale.

Speaker 1 (15:27)
So as we look at the process of beginning to explore a sale or an investor coming in, what is the lead time? I mean, you said looking at the last three years of information for positive growth, but what is it that we’re really looking at? Because if we’re looking at someone right now who is in business for two years, right, so there’s not three years of history in the business. Are they in a position to start looking at selling their business right now, or is this a longer term situation? What do I need to be really thinking about as that entrepreneur who is looking at ultimately selling their business or getting that investor to come in?

Speaker 2 (16:25)
So the answer is that if you’re in business two years and let’s face it, life happens. The stories I hear about people and what they go through with losing children, losing spouses, spouses, being in the military and being deployed overseas, and things that just crop up in life where they just don’t see how they’re going to be able to run a business and deal with their life situation as well. We absolutely can help them and help them sell and we do what you have to note is that you might not always get top dollar if you were in a position where you could hold on to it and grow the business. You are somebody who’s in business for two years and you’re just wanting some advice as to what do I need to do over the course of time to make my business more valuable? We can offer coming in and doing evaluation report, and we call it a broker’s opinion of value. And it’s a nice report where you can take your financial information and we can do the research on the different comparable business sales. And that’s one methodology that we use to measure the value of the business.

Speaker 2 (17:48)
We do a risk-based methodology and then we also do a buyer’s test method which incorporates can the business service debt, can it pay its owner a reasonable salary? Can it invest in capital expenditures? And based off of those three different methodologies, we can come up with the value of the business today. And in looking at the business and working with the owner, we can come also come up with maybe up to ten items that the business owner could work on in order to maximize their value in the future. And we actually did this for a client. So here’s a live example of what happened there was someone who probably about ten years ago came to Murphy saying they had inherited some money and they wanted to buy a business. So they actually purchased a franchise of a water mold fire restoration company. They’ve owned it for seven years. Their kids were growing up. It was a husband-wife lives locally in New Jersey and their youngest son was graduating from high school in 2020. So in 2017, seven years in, they came back and said, look, in three years we think we want to sell because our son will be out of high school and we want to move out of state.

Speaker 2 (19:16)
Covid you do evaluation report for us. So we did and we gave them some advice as to what they needed to do. And they started working on that in 2017 because they knew they had this three year plan. Fast forward to 2020. Not only did they not sell their business, they decided to purchase another complimentary business instead and to grow because they had implemented some of the things we recommended, like putting managers in place so that they wouldn’t have to be there all the time to give them the bandwidth to expand and grow. And it also gave them more options because then they realized our plan was to move out of state. We’ve set this business up that we could manage it from out of state and we wouldn’t necessarily have to sell. So I really like to call succession planning success planning, because it doesn’t mean that it’s the end of something. It doesn’t necessarily mean that you’re going to sell your business. It’s really just good growth information for you to have that gives you more optionality as you go through the years. And one of the options very well, maybe, yes, I want to sell, but it also might be other things that you didn’t even know.

Speaker 2 (20:43)
It just unlocks future potential and future opportunities for your business to get this type of report done.

Speaker 1 (20:52)
And that’s definitely great advice if you’re thinking about possibly selling the business at some point in the future to get this valuation report. So, Cheryl, let me ask, when I engage you to do this valuation report, how long does it take? What are the expectations in terms of getting the report? You mentioned that it’s a nice report and you go through a lot of the financials and things along those lines. But what do I really need to be aware of? How involved do I need to be in the process and what kind of information do I really have to make sure that I have? Like, do I need audited financials or is it just my QuickBooks file that I give you that you’re reviewing for my budget sheet and PNL statement? Or is it what do we really need to know? Because if I’m a listener to the program, I just want to understand what am I really getting into in terms of that expectation sure.

Speaker 2 (22:07)
So we do have an engagement agreement that we would sign with a client who would want to do this. The turnaround time is once I have the information I need, it would take me about a week to produce the report. So it’s not a lot of time on my part. The time might come into the owner gathering the information I need. Sometimes that could take a week or two weeks. So it might be three weeks or so from the beginning. That when we first talking about wanting one to when I’m actually delivering the report to the owner, the information I would need is again, tax return. We start with that as the basis. So we consider those to be the official books and records. When you get into a time frame like we are right now, January the beginning of the year, you might only have QuickBooks reports for 2021. I could certainly work with that in the absence of a tax return. And I would need to have access to somebody, whether it be the owner or their bookkeeper or accountant, someone who has detailed knowledge about the seller discretionary items that might be buried in those tax returns that I want to make sure I identify as add backs in the process.

Speaker 1 (23:33)
And that’s great. So at least now we understand what we’re getting into when we decide to engage you or any other party that’s helping us with that valuation. So, Cheryl, how can people find out more about you?

Speaker 2 (23:54)
I have a website, which is Murphybusiness.com/Madison, which is where my office is located. I have a LinkedIn profile, Cheryl Venezia, and I have a Facebook page, Murphy Business Sales of Madison, and then my email is c.venezia@murphybusiness.com and my cell phone number, 908-370-5034. I’m happy to have a no-obligation introductory meeting with anybody who wants to talk to me. Business is business, but business is also personal. And I think it’s very important to meet with people face to face, whether it be on Zoom or in person or however people are comfortable in today’s environment to get together.

Speaker 1 (24:56)
Absolutely. Thank you. And Cheryl, I want to thank you again for being our guest on the program today. There is so much helpful information and understanding what is actually involved in getting evaluation for the business and getting all of that together so that I can think what do I need to do if I’m looking at ultimately selling my business in a couple of years? So I think that that’s really important that we are helping our fellow entrepreneurs in getting their businesses ready for ultimate sale. And so for all of you that are listening, think about really what it is that you’re looking at doing over the next three months, six months, year, three years, five years. If we’re thinking about where we want to be, do we want to, like Charles mentioned with that remediation company? Do we want to have ancillary services that come in or do we want to completely exit a business? Do we want to get a sister business that has nothing to do with what we’re doing, but it’s another way of helping us ultimately grow. A lot of decisions are going to be made based on the facts that you look at in your business today.

Speaker 1 (26:24)
If your business is well-performing and you are in a position to acquire additional entities, that can be an amazing increase in terms of your overall valuation. Whether it’s five or ten years down the road or maybe it’s something that you want to ultimately hand off to your child in a generational business. So there are a lot of different opportunities that you have as you’re looking really at where you want to be and how you want to continue and so think about reaching out to Cheryl and finding out what it is that you need to do in order to start seeing that value and know exactly where you’re going to be in your business.

(27:11)
On that note, this has been another episode of MOJO: The Meaning of Life & Business, and here’s to your success.

About Cheryl: Cheryl Venezia spent her early career working in public accounting performing audits of large public companies.  She then worked for almost 30 years at UBS PaineWebber working internally as an accountant within various divisions. Cheryl then decided to become a business broker in order to use her financial and interpersonal skills to help others achieve their goals.

Connect with Cheryl on LinkedIn or online at https://murphybusiness.com/madison/ to get your free initial consultation and $250 off your business valuation report.