If a business in a specific industry is going to sell for 3 to 4 times earnings, what determines whether the buyer will be willing to pay the lower or higher multiple? In other words, if adjusted earnings are $800,000 and the industry multiple is 3 to 4 times earnings, what determines whether the buyer will be willing to pay $2,400,000 versus $3,200,000 for the business?
There are some basic value drivers that can rapidly increase or decrease the value of a business.
- Books and Records: Are the books and records in reasonably good shape? Are they straightforward and consistent so that an interested buyer can clearly see what the business is generating in revenue and what costs it incurs in the process? Can the buyer easily determine the working capital requirements?
- Management Team: Does the business owner have a management team that handles the day-to-day operational decisions within the business? Can the business owner take a six or eight week vacation without detrimentally effecting the business?
- Business Relationships: Is the business owner the sole rainmaker or is there a sales staff? Is the business owner the sole interface with clients and vendors?
- Client Concentration: Does the business have a client concentration issue? Does any single client generate more than 10% of the company's revenue?
- Employee Issues: Are the employees paid properly on W2s or are some employees classified incorrectly as 1099 contract workers? Are any employees paid cash? Are all employees properly documented with I9 forms on file?
All of the questions outlined above will effect not only whether the buyer is willing to pay the lower or higher end of the multiple, but also whether the buyer will buy the business or walk away and look elsewhere. The cleaner the books, the higher the value. Sales staff in place increases the value. A broad base of clients with the largest client generating less than 5% of revenue increases the value. Employees properly documented and properly paid on W2s increases the value.
If you want higher multiples for your business, identify and clean up any issues in the categories above. In addition, identify and correct any issues that would cause you concern if you we're standing in the shoes of a buyer. Your return on investment will be well worth the time.