While you might think your business is priceless, buyers will ruthlessly reduce your creation to dollars and sense, according to Judith Scarborough of Master, Sidlow & Associates, a Wilmington accounting firm.
Scarborough was one of three featured speakers at an event sponsored by the Small Business Development Center (SBDC) of Delaware at Baywood Greens this month that focused on exit strategies and prepping a business to sell.
“How much you need in retirement has absolutely no bearing on what your business is worth,” warned Scarborough, who said that, while the vast majority of business owners would prefer to transfer their business to their children or employees, most sell to a third party.
Scarborough said strategy is critical, and buyers should ask themselves three questions well in advance of selling:
“¢ How much do you think your business is worth?
“¢ When do you think you’ll leave?
“¢ To whom will it transfer?
“If you don’t plan, your departure won’t be on your preferred terms,” she said.
Part of the preparation process should include a formal valuation of the business, an inexact science because there’s no real market for each specific business.
Nature, history and earning capacity make up some of the quantifiable factors of a business valuation. But other factors drive the value of a closely owned business, including capitalization, diversification of products and services, labor force pool, and the quality and depth of management, according to Scarborough.
“If you have a business with one product and it becomes obsolete, then that business won’t be worth as much,” she said.
David Bernstein of RLS Associates, an investment banking firm, agreed.
“Those who do not plan make a tremendous mistake,” he said, noting sustainable, transferrable profitability, or STP, is what buyers really purchase.
“Just because you can make money, doesn’t mean the buyer can,” said Scarborough, who added that the last two years have generated all-time levels of mergers and acquisitions.
“You have to make a company that’s sustainable and transfer that value. Proprietary technology, proprietary services, contracts that go on, these things increase value.”
Bernstein urged buyers to choose the right time to sell, diversify the businesses’ client base, and formalize contractual relationships.
Jennings P. Hastings of Faw Casson said businesses, including family-owned farms, should share their plans with family and re-evaluate their strategy often.
“There’s no such thing as a perfect plan,” he said.
The event was part of the 2017 Business Development Series, also sponsored by Delaware Business Times.
