Planning to sell? (Part 1)

Planning to sell? (Part 1)

Bookkeeping tips to help ensure you receive maximum value.

Part 1: Know Your Value

By Andrew R Holtgrewe

Most business owners eventually plan to sell their business; however, few owners realize that a few simple bookkeeping practices can improve their financial transparency, making their business even more valuable for a potential buyer.
Common practice in small business valuation dictates that a fairly simple formula can be used in determining the starting point for pricing a business. This two-step formula is:

EBITDA + Owners Compensation + Personal Expenses + Non Recurring Items = Sellers Discretionary Earnings

Sellers Discretionary Earnings x Valuation Multiple = Business Value

There are a few derivatives of this formula, but this is generally the starting point. As a business owner, the more add-backs (personal expenses and non-recurring expenses) you can capture and support, the higher your business value.