Note: The higher multiple results from an increase in both revenue and cash flow and the corresponding reduction in long term debt. As the financial risk decreases, buyers are willing to pay greater multiples.

Below are some of the common and significant misunderstandings by business owners considering the sale of the family business:

• Net Sales Proceeds - This is the amount the owner receives after taxes, commissions to a broker or agent representing the company for sale, closing costs and attorney fees and the repayment of bank loans the company may have. In many cases the net proceeds may be less than 50% of the selling price.

• Reinvestment of Net Sales Proceeds – Remember, it is not the net sales proceeds that one lives on after the sale of the family business. In most cases, it is the reinvestment of those funds to create a monthly income to replace one’s previous salary. Suppose current market conditions are such that your net proceeds could be reinvested to earn 60% of your present salary. Would you still sell? If your answer is no, is there any guarantee that the company will continue to do well and provide you with the same salary for years to come? Do you want to continue to work 50 hours a week to insure that it will?

• Seller Financing – Most business owners think too much about the price they will get for the company. In fact, it is the deal structure and not the price about which one should be concerned. After all, is an all cash price of $1 million better than a price of $1.2 million where the buyer gives the seller $200,000 in cash and asks the seller to hold a note for $1 million? What if the buyer runs the business into the ground and you have to take it back and rebuild it? What if the buyer goes bankrupt and you have a prolonged legal entanglement costing you thousands of dollars before you can get the company back?

Over 70% of all small business sales involve some level of financing from the owner. This is mainly due to concerns lenders have regarding the condition of the business. It also can be due to the lack of assets to serve as collateral for a lender. These issues are all avoidable with proper planning and execution.

Most sophisticated business consultants understand valuation and deal structure. They can analyze any business and determine the probable sales price and deal structure based on the buyer, company financial condition and available financing. Using these sophisticated models, one is able to approximate the net sales proceeds to an owner and the probable income those funds will generate using present market returns on investment options.

It is likewise possible for a business consultant to estimate the sales outcome based on any number of assumptions. For example, if sales were to increase by 5% annually and/or the company made changes in fixed-variable expense levels, new pricing policies, an acquisition of a competitor or introduction of a new product-service line, etc.

The process can be approached in reverse by first determining the minimum annual income an owner desires after sale and determining the applicable “net sales proceeds” required to create that ongoing income stream. Once the net sales proceeds have been established, it can be adjusted by adding back bank debt, closing costs, and broker commissions to arrive at a selling price. If that price is unrealistic, you know there is work to be done to increase the value of the company and now is not the time to sell the business.

Call us for a Free and Confidential Consultation. After all, you have spent a lifetime building a company and sooner or later it will be time to cash out. Wouldn’t you like to know where you stand today so you can determine where you need to head tomorrow?