First, determine what type of small business you are. If your net profits are below $1 million and your gross revenues are below $3 million, you may be a "mom and pop." This somewhat disparaging term used to refer to companies with revenues under $1 million, but times change and inflation has pushed the net profits to where the revenue numbers were 15 years ago. At this level, you will be looking for people who want to run the business as you have, people who are basically buying themselves a job. Given the instability in the financial markets, more and more people are looking to buy a business as a way to insulate themselves from the financial markets and create long-term value. Most companies in this market size are currently selling for 1.5 times to 3 times their EBITDA (earnings before interest, taxes, depreciation, and amortization). However, this does depend on your market niche.
Larger small businesses may be in line to be acquired by private equity companies that buy and hold, or buy, grow, and sell businesses. To qualify for this type of buyer, the net profit needs to be greater than $2.5 million. If net profits are lower, then the gross revenue needs to be above $10 million. Most companies in this market size are currently selling for 3 times to 6 times their EBITDA, depending on the market niche.
If your business is between these two general business market types, the major factors for determining where your company fits will be the percentage of annual growth, the size of your customer base, and your market channels.
Many small business owners run their business at breakeven or at a loss most years for tax purposes. When faced with this, my company’s practice is to recast the financials, excluding the discretionary expenditures, such as company cars, rent paid to the owners, club memberships, company funded retirement plans for the owners, and the like.
Decide which type of buyer your company will attract, then shine it up so you can receive top dollar for it.
Marilyn J. Holt, CMC