If you, as the seller, want to receive the best price for your business, it’s essential to understand that your adjusted or normalized EBITDA will serve as the foundation for the purchase price. This EBITDA will be used as a multiple to negotiate the final price. Every dollar counts; for example, if your EBITDA is off by $50,000 and the multiple is three, the final acquisition cost of your business is reduced by a significant $150,000. In short, these multiples matter, underscoring the critical importance of reaching an accurate EBITDA for your business.
Let’s explore a couple of common EBITDA adjustments that sellers should be aware of. One adjustment may come from a one-time event, such as an insurance settlement, legal expenses, or PPP loan forgiveness. Unusual expenses associated with the growth of the business can affect the adjusted EBITDA. Another factor is the conversion based on GAAP accounting, which can vary widely.
Balance sheets are crucial when it comes time to outline the financial health of a business. It is common for smaller businesses to focus solely on profit, often neglecting to review their balance sheets as frequently. Balance sheets should be presented clearly, allowing potential buyers to understand the true assets and liabilities involved in the sale. It is best to be upfront with this information to prevent any surprises during due diligence.
At the end of the day, business owners should keep three important points in mind when preparing to sell their business. First, consider having a Quality of Earnings analysis performed. This will provide a clear understanding of your business’s health. Second, ensure that your key managers and employees are prepared and capable of running the business during the transition period. Third, take all necessary steps to review your financials, and be ready for GAAP reporting requirements during due diligence.
Importantly, sellers should not cut corners on any of these three points, as all are vital to the successful sale of your business. It’s important to note that selling a business is not a one-dimensional process; it encompasses many different aspects. Business brokers and M&A advisors are critical to the process, as they understand what it takes to defend an EBITDA. This helps to ensure that sellers receive the right price for their business.
Copyright: Business Brokerage Press, Inc.
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