This is the first in a series of articles outlining the steps any business owner can take to maximize the value of his/her business when it comes time to sell it.
- Optimize Cash Flow
It probably comes as no surprise that the primary driver in determining the value of any ongoing business is its provable cash flow. Cash is the lifeblood of any business and the more successful a business has been at generating cash, the more valuable it will be to any buyer. Cash flow can be increased by (a) Increasing Sales, (b) Decreasing Costs, or (c) a combination of both.
Also, a savvy buyer will almost always ask a prospective seller, what his/her ideas are on how to continue growing the cash flow of his/her business. You will want to consider your answer to this question very carefully. A business without any growth prospects is not worth as much as one that has immediate growth opportunities. On the other hand, if the opportunities are that obvious, and that immediate, a savvy buyer will want to know why you haven’t pursued these opportunities already.
2. Separate and Optimize Real Estate
If you lease the commercial real estate your business operates from, this might be a good time to re-negotiate a lower lease rate in exchange for a longer lease term. Also, consider negotiating several short options to renew your lease so that the total term equals or exceeds ten years. Most commercial lenders will cap the buyer’s loan term at ten years, or the maximum remaining term of the lease. Having ten years to pay it off makes the monthly payment that much more affordable for the buyer.
If you own the real estate inside your business, this would be a good time to separate the real estate into a separate entity still owned by you, and have the business pay fair market rent to the new entity. Since the current selling price multiple for $100,000 of business cash flow is ~3-5x, the multiple for the same amount of net operating income from real estate is ~8-12 times. Thus, while this will lower the business’ cash flow, and the business’ selling price, it will substantially raise the combined value.
Separating the real estate and offering the business for sale with the option of either renting or acquiring the real estate will also substantially increase the pool of buyers who might be interested in your business.
To be continued…
If you know of a business owner who’s thinking of selling or buying a business and who might benefit from a complimentary, confidential, consultation with us, have them contact me at mertel@transworldma.com
Mike Ertel, CBI, M&AMI, CM&AA
Managing Director
Transworld M&A Advisors
813.299.7862 Direct
©2023 J. Michael Ertel PA