Sunday, December 2, 2012

It's All About EBITDA

A prospect visiting his first Chief Executive Boards International meeting this month told a familiar story. He was going through the process of due diligence with a professional buyer looking at the purchase of his business. He was discovering, far too late, as many business owners do, what really drives the value a buyer is willing to pay for a business.

He went on to say that this had been "The most demeaning experience of my life." The professional buyer, a private equity group, was examining every nook and cranny of his business -- his financials, his facility, his process documentation, etc. and they were finding things he was surprised about. He's starting to realize that each one of those "finds" will become a downward notch in the value of the business. This is known as "deal creep" in the M and A business.

He mentioned that "you do things to reduce your taxes" when you own a business.  Many owners do, but I wouldn't suggest that if you're expecting to sell any time soon.

I was once looking at buying a small machining business, offered by a business broker. I'd visited the plant, which was pretty much a dump - looked like nothing had been cleaned up in at least 10 years. I asked the broker for the financials, and he said, "That's going to take awhile. We have to extract the vacations, trips, cars, boats and other personal expenses from the income statement." Enough said. This business owner had set up a distress sale for himself without even knowing it - the offer he'd likely get from me or from anyone else would be perhaps 1/4 what he'd like to sell the business for, simply because it's not in any shape to sell. I never heard from the broker again.

Want to hear abou how to get a great price for the sale of your business, from a guy who actually did? Here's a CEBI member's 3-minute video essay on how to increase the value of your business. In part, he says,
"Before you offer your company for sale, build value..... You want to drive your sales up as much as you can..... The most important thing -- increase profit -- I don't care what you have to do..... Don't worry about your taxes, remember, you're talking about a multiple of 5 or 6.... Don't worry about your own car, your own fringe benefits, your own golf club membership -- cut that out..... It's income-based."
Depending on the size of your business, this understanding could be worth something between a few hundred thousand dollars and ten, twenty or fifty million dollars. I was happy to see that a CEBI member who takes something valuable out of every meeting wrote on his meeting evaluation, "It's all about EBITDA."
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Terry Weaver

Chief Executive Boards International
Chief Executive Boards International: Freedom for business owners & CEOs -- Less Work, More Money, More Freedom to enjoy it

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