By Eugene E. Valdez
One of the most popular or “trendy” topics floating around today in my world of privately owned businesses and entrepreneurial CEOs, is the topic of selling one’s business as an exit strategy and the concurrent subject of future business valuation to determine the selling price.
According to Jerry Mills, author of the “Exit Strategy Handbook” one reason for this is those darn “Baby Boomers” who once again are in the forefront of an emerging trend due to their sheer numbers. Per the SBA Office of Advocacy the definition of a small business is a business with 500 or less employees. Based on 2010 data, the SBA office determined that there are about 28 million businesses in the USA that matched that criteria.
Mr. Mills’s research indicated that about 43% of these 28 million businesses or 12 million are owned and operated by “Baby Boomers” or those individuals born between January 1, 1947 and December 31, 1964. ( I am one of them !!) . Further, experts predict that about 60% of this 12 million or 7.2 million baby boomer owned business, will be put for sale in the next 10 years flooding the market creating downward pressure on selling prices.
What’s does this all mean to you, the CEO of a privately owned Inland Empire Based business?
Well, if you are considering selling your business sometime in the next 3-7 year horizon the experts recommend that you start the process today to maximize the future “enterprise value “ of your company.
What do the experts suggest??
Start the recruitment and development of your group of Exit Strategy Advisors today. These advisors could include but not be limited to:
o Commercial Banker
o Business Appraiser
o Commercial Insurance agent
o Investment Banker or Mergers & Acquisition Professional
o IT Professional
o Personal Financial Advisor
In the interest of space I will focus only on the potential role of your commercial banker in the exit strategy process because that is what I do for a living and that is what I know.
The first step is for you the CEO, (or your CPA) to prepare financial projections covering a period of 5 years that will include Balance Sheets, Income Statements and Statements of Cash Flow. Be realistic with your assumptions and share these pro forma statements with your banker. Your banker will able to determine what type of bank financing you will need to realize your sales and EBITDA, (earnings before, interest, taxes and depreciation) goals.
This 5 year financing program may include:
o Working capital needs in the form of a short term line of credit
o Furniture, fixtures, equipment, leasehold Improvement needs in the form of medium term loans, or
o Commercial Building needs in the form of a long term commercial mortgage.
While there are several ways to value a business one of the simplest is a formula based on a multiple of a company’s EBITDA, (discounted cash flow another way). Let’s say you are forecasting an EBITDA of $2 million five years from now. Multiples are generally in the 5-6 range. Five years from now, thus your business might be “worth” or sell for, … $10- $12 million dollars.
Another way your banker could help you is to provide the potential buyer some of the financing they need to cash you out. Your buyer could be a Private Equity Fund, a competitor, your management team, or private investor. In either case they may need some “senior bank debt” along with the investor capital to complete the purchase and send you on your way to enjoy your riches!!
Eugene E. Valdez is a SVP with Pacific Mercantile Bank which serves entrepreneurs in the Inland Empire as well as the greater Southern California area. Mr. Valdez can be reached at email@example.com or 909-743-9203.