Valuing Your Business For Sale

You want to sell your business, but how much is it worth? Can you prove it?

Once the decision to sell a business has been made, arriving at the correct valuation is the most important step to be taken. Setting a value that is too low means you are leaving your hard-earned money on the table. Set the value too high and no one will buy it. And regardless of how you value it, being able to prove it is vital.

The most important determinant of your business’ value is the amount of money that is left over after all normal business expenses have been counted. Sometimes called EBITDA (earnings before interest, taxes, depreciation, and amortization), it is the foundation of your value and is simply calculated as total revenue minus total operating expenses. But using this simple calculation risks undervaluing your business, leaving a lot of money on the table!

As a Business Broker, I look for the following ways to adjust your EBITDA to a more true reflection of how much your company really makes. Called recasting, this process adjusts your company’s value in a provable, legal way. Here are 7 ways I look to recast your business and get to a true valuation.

1. Lifestyle expenses. Over time, many business owners tend to mingle their business and personal finances. Often many personal expenses like luxury cars and family vacations are deducted as a business expense. These business deductions for lifestyle expenses negatively impact your company’s earnings profile, so they need to be carefully added back to your EBITDA.
2. Owner salaries and bonuses. The business owner’s compensation rarely matches what a hired executive would be paid. In most cases, it is higher, but in other cases it is lower. Either way, it needs to be adjusted to provide a more accurate EBITDA. So, if the owner gets a significant year-end bonus, adjusting that payout will result in increased EBITDA. If the owner only takes a nominal salary, the EBITDA will go down.
3. Family members’ wages and benefits. Don’t forget family members on payroll. Many business owners use family members to shift income and/or provide employment and benefits to loved ones at above-market wages. Unless the family member will continue in their current position with the same salary and/or will not be replaced with another for a similar wage, the salaries and benefit costs should be added back to the EBITDA.
4. Start-up costs and one-time expenses. If a new product or service was introduced, or a major one-time expense was incurred within the last three years, those costs should be eligible to be added back to EBITDA because they won’t be incurred again going forward. Note that many of these line items are often negotiation points with buyers, so have a clear business case for why these expenses will not continue in the future.
5. Lawsuits and professional fees. Any expense related to a lawsuit or other non-recurring legal and financial obligations—lawyers’ fees, court costs, settlements etc.—that occurred during the last three years should be added back to your EBITDA. Don’t forget consultants, business coaches, and other advisors hired for projects and initiatives that are unrelated to the continuing operations of the company.
6. Adjust rents to fair market value. Many business owners buy buildings and plant facilities and then lease them to their companies at rents that may be above or below fair market value. These expenses should be normalized to fair market value for your area and industry.
7. Repairs and maintenance. Business owners will often list capital expenses as repairs. While that is a good way to minimize tax liability, it’s lousy for your company earnings. So, it’s crucial to identify and add any of these capital expenses back to the EBITDA.

Working with a qualified business broker on recasting, you can maximize the value of your company and set the highest price for your sale. Best of all, if the process is done correctly you can prove it to anyone who is interested in buying your company.