Today on the Atlanta Small Business Show we’re joined once again by Ted Jenkin, CEO and founder of oXYGen Financial. In this segment we get Ted’s feedback on a question often asked on ASBN, I want to sell my company. What are the next steps? This is a big move for a lot of small business owners as a lot of their wealth is tied up in that one asset.
Tune in to today’s show to hear what Ted has to say.
VIDEO TRANSCRIPT
Jim Fitzpatrick: So, talk to us about how to determine the value of your company and what has to go into all of the different steps of selling your company?
Ted Jenkin: Is it too simple to say buy low and sell high? That’s the idea.
Jim Fitzpatrick: Yeah, that’s the idea.
Ted Jenkin: But it really is. But a lot of owners never really value their business until that very point where they’re ready to sell. And I recommend a few years before you want to sell, ask yourself is my business going to be valued on some multiple or recurring revenue in my business? Or is it going to be valued on the net cash flow of my business? Or on my receivables.
Jim Fitzpatrick: Yeah.
Ted Jenkin: Because every business has a different way that it’s valued. But you want to figure out the ballpark of where your street value is, so you’re not surprised when you put your business on the market. A lot of times, business owners on paper think their business is worth X, then they list their business like they would their home for X, and it’s not always exactly what you think it would be.
Jim Fitzpatrick: Exactly. So what’s the first step in them finding out if this is not their area of expertise, to find out, you know, business values. Do they get with a consultant? Do they get with someone like you to say, hey, what do I have here?
Ted Jenkin: Yeah. You want to find a qualified financial advisor or a business value expert, somebody that has the expertise to actually appraise the business. And there’s a litany of people anywhere from CPA firms to financial advisors that will do this at a low cost that may be 3 to $5000. At a big business it could be 20 or $25,000.
Jim Fitzpatrick: Yeah.
Ted Jenkin: To value your business. But yet remember, you’re starting to clean up your financials now.
Jim Fitzpatrick: Right.
Ted Jenkin: A lot of times owners have 92 skeletons in the profit and loss of their business. You got your car on the business. You got vacations in the business.
Jim Fitzpatrick: Sure.
Ted Jenkin: And so, you want to clean it up to get ready for a seller that will be really able to transparently see what’s actually happening in your business.
Jim Fitzpatrick: Yeah, for sure.
So, and in doing that, cleaning up the financials, that’s gotta take some time. So to your point, don’t just decide to sell your business and like we do with our home, list it in 30 days, right? It’s gotta be something that you’re looking at for a couple of years, right?
Ted Jenkin: No, I mean, a lot of owners that have QuickBooks and then you have to say, what’s this? What’s this? What’s that?
Jim Fitzpatrick: Right.
Ted Jenkin: So if you have things in there that don’t make sense or wouldn’t normally trigger out in a P&L, I’d say get those cleaned up, especially in how owners categorize their profit and loss of QuickBooks and thing like that.
Jim Fitzpatrick: Sure.
Ted Jenkin: And then most importantly for owners, when you prepare your exit, you know, Jim, a lot of owners don’t know what to do. What will you do with yourself when you sell that business.
Jim Fitzpatrick: That’s a very good point.
Ted Jenkin: Are they going to make you work in the business for three years to retain the clients. Are they going to pay you a bunch of cash and now that you have $5 million, what will you do now?
Jim Fitzpatrick: Right.
Ted Jenkin: In some cases, the lump sum money that you get may not actually be enough to cover the salary, the distribution, and the embedded expenses that you took in the business, so you have to calculate all that when you sell your company.
Jim Fitzpatrick: Yeah, that’s right, that’s right. You might be sitting, they’re thinking you’ve got $5 million in equity in the business. And at the end of the day, after all of those things are deducted, you’re sitting with a million or $500,000. Right?
Ted Jenkin: That’s right. If you had a $4 million sale-
Jim Fitzpatrick: Right.
Ted Jenkin: You paid capital gains tax. Let’s say you walk away with 3 million, and you make 5% on your money, that’s only gonna generate $150,000 a year of income.
Jim Fitzpatrick: Sure.
Ted Jenkin: Meanwhile, you are making 400,000 in the business, and you might be saying, wait a minute, I thought if I sold my company I would live exactly the same lifestyle that I had when I had my company. And this is why you find out some owners don’t plan well when they make an exit.
Jim Fitzpatrick: Yeah, for sure.
I’ve got here a note to boost your sales. Talk to us about that.
Ted Jenkin: Yeah, well, I think if you’re going to sell your business, a lot of buyers will look at the trailing three years of what happened in the company.
Jim Fitzpatrick: Right.
Ted Jenkin: So if you’re three years out from that event, you might want to say to yourself, it makes sense to invest more money in marketing or more money in strategies to grow that topline revenue, to grow your EBITDA, so you’ve got a more valuable business because no owner wants to see a declining revenue business. A declining cashflow business-
Jim Fitzpatrick: That’s right.
Ted Jenkin: That’s gonna buy your business.
Jim Fitzpatrick: That’s right. In fact, they’ll underbid you if they see a downward trend, won’t they?
You say to find a business broker, talk to us about the importance of that.
Ted Jenkin: Yeah, most people when they sell a piece of real estate, although you can do real estate by yourself, they generally find a broker. But selling a business is difficult because do you think you can find five or ten qualified buyers? A lot of business brokers not only know the marketplace, like other businesses and where they’ve sold, but they’ve got a litany of buyers that may be ready to go to buy your business. So, hiring a good business broker even though you will pay some commission, like you would when you sell real estate, could be very valuable if they command a higher price for your business.
Jim Fitzpatrick: Yeah, for sure. This seems to me to be something that a business owner does not want to do by themselves. I mean …
Ted Jenkin: The only way you’d probably do it is that if you build an internal strategy, you have kids that take over the business, or you’ve been grooming a right-hand person for many years and strategy is, like, if you’re a dentist, and you’ve been grooming somebody who is going to take over the business as a junior dentist, that may be a little bit easier. But if you’re outright selling the business and getting out, you’re gonna need someone to line up those qualified buyers.
Jim Fitzpatrick: Yeah. Talk to us about lining up qualified buyers and to pre-qualify the buyers. What goes into that?
Ted Jenkin: Well, it’s not different than when you get a house. If you don’t have a pre-qualified buyer, some puts an offer on your house, and all of a sudden you say, I accept, and then they don’t have the financing, that’s a real problem. So you want to make sure that they’re financed with the bank. Or if they have private equity financing that you can see something that they’re financed. So if you agree on a price, they can actually trigger and pay you the cash. Otherwise, you could have a problem if they tell you, yeah, I have money in the bank. That’s probably a problem. You want to make sure that the financing is legitimate and it’s lined up for the sale.
Jim Fitzpatrick: That’s right.
And DNA has got to be signed on everything that before any numbers go out, right?
Ted Jenkin: Yeah, absolutely. If you’re going to have any sort of letter of intent on the business or things like that, any sort of non-disclosure has to go into place because you don’t want someone sharing your financials.
Jim Fitzpatrick: Right.
Ted Jenkin: And it you don’t get those legal documents signed or you have a lawyer that has expertise in selling businesses, you could have leaky information in the marketplace. And assume you’re out there as a small business and there’s only two dentists in town and the other dentist finds out you’re selling and the financing falls through, that’s a real problem for your business. So, you need to make sure that everything’s confidential.
Jim Fitzpatrick: Absolutely.
Well, once again, Ted Jenkin, founder and CEO of oXYGen Financial. I appreciate your time with us here on the Atlanta Small Business Show. This has been great information for our viewers, and hopefully we’ll have you back here shortly.
Ted Jenkin: Thanks so much.
Jim Fitzpatrick: Thanks.
