CLIENT KNOWLEDGE BASE

    Part 1: Built to Sell


    Welcome to the Anomaly CPA "Built to Sell" series, a journey designed for small business owners eager to understand, grow, and potentially prepare their businesses for sale. Whether 1 year away or 30 years away, we believe that all small business owners should take time to understand their business value, improve it and measure it.  Over the past several years, several of our clients have sold, whether to a related party, private equity or family.  Each transaction is unique but each have some common elements as well. 

    Over the course of this three-part series, we will delve into the nuances of valuing a small business, strategies to enhance its value, and effective methodologies to track the evolution of your business's value over time. 


    1. 1

      Valuing Your Small Business

      Understanding the Basics of Business Valuation

      Valuing a small business, especially those with under $10M in revenue, is both an art and a science.  The "big players" typically want to buy businesses over $10M, as they aren't as interested in getting their hands dirty in the scale-up phase.  Thus, most of us want to enhance our business value for the buyers under the $10M threshold. 

      Two primary methods are frequently employed to estimate the value of small businesses: the EBITDA multiple approach and, for service-based businesses, the revenue multiple approach.

      1. EBITDA Multiple Approach: For the non-accounting nerds, EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It's a measure of a company's overall financial performance and is used as an alternative to simple earnings or net income in some cases. For small businesses under $10M in revenue, the typical EBITDA multiple used ranges from 2x to 5x. This range reflects various factors including industry, growth potential, profitability, and risk. A higher multiple is generally indicative of a business with a strong growth trajectory and lower risk factors.
      • If a business under $10M has a low-profit margin, expect that multiple to be closer to 2x.  If you are at or near your industry norm for profit margin, you will creep up that scale.
      1. Revenue Multiple Approach for Service-Based Businesses: Service-based businesses, which may not have substantial physical assets, often use a revenue multiple to determine their value. This multiple typically ranges from 0.75x to 1.5x of annual revenues. 

      • Factors influencing where a business falls within this range include the company's growth rate, customer base stability, profit margins, and the competitive landscape.  Further, the factors below will certainly have influence on what the multiple ends up being.
    2. 2

      What Small Business Buyers Value Most...

      When considering the purchase of a small business, buyers prioritize aspects that ensure the business's sustainable growth and profitability post-acquisition. 

      From our experience in SMB mergers and acquisitions, two key factors stand out:

      • Customer Lifetime Value and Recurring Customers: A strong indicator of a business's health and future profitability is its ability to retain customers and maximize their lifetime value. Recurring customers not only provide a predictable revenue stream but also reduce the cost of sales relative to acquiring new customers. Businesses that can demonstrate a high customer lifetime value and a solid base of recurring customers are often more attractive to potential buyers.
      • If your business has low or limited "repeat buyers" it may be a factor to consider in the future.  Ultimately, sophisticated business buyers want some "certainty" in the cash flow streams they are buying.  If they are unsure the customers will remain post acquisition, they absolutely will devalue your multiple. 
      • Removal of Owner Dependency: A business heavily dependent on its owner for operational success poses a significant risk to buyers. 
      • The ability of a business to operate independently of its current owner is a critical factor in its valuation. Systems, processes, and a capable management team that can ensure the business's continuity without the owner directly managing day-to-day operations significantly enhance its appeal to prospective buyers.
      We often see buyers requiring the business owner to stay with an "earn out".  Consider this - do you want to be an employee of your own business, after you sell it?  If you do not, consider finding ways to completely remove "key man" risk and your owner dependency.  

      In part 2 of this series, we will explore the best ways you can practically begin to increase the value of your business. 

      In the meantime, if you have any questions, please reach out to the team on Soraban. 
    If you still have a question, we’re here to help. Contact us