So you’re thinking of selling your dealership and aren’t sure what it is worth. How can you make a decision about moving forward without a value? Can you get enough to truly retire? Is the time right? How can you maximize the value? These are all very important questions.
The first thing to understand is how value is typically derived. There are a number of factors that most buyers take into account when valuing a business
Net Profit History – Your overall profitability over the last few years is an important gauge of value. Many buyers will pay a multiple of annual net profit or EBIT (Earnings Before Interest and Taxes), as it is commonly referred to. When figuring profit you want to add back any personal and/or non recurring expenses. These are things like country club memberships, personal travel, non business expenses, etc.
Recurring Revenue – Revenues like maintenance contracts, machine rentals and supply sales add value to your business because they continue after the sale. If you want to maintain the value of your business don’t give away or discount your recurring revenue.
Customer Base – Your base of customers and the mix of equipment and services you’ve sold them has a big impact on the value of your company. If you have a base of strong equipment placed with good customers your business value goes up.
Employees – A large portion of the value of your business is based on the employees you have in place. Finding, hiring and training new employees are difficult tasks, especially in sales. If you have a strong staff buyers are willing to pay more for the business.
Markets Covered – The territory that you cover can not only add to the value of your business but it can also bring buyers to the table. Often dealers that want to expand will look to buy companies in the markets they want to expand into. However, you need to cover the markets effectively. Buyers typically don’t pay extra for territories that don’t have customers.
Future Business Potential – Future sales are best predicted by past sales. However, there can be extenuating circumstances that will lead to sales in the future. If you have something on the horizon that will lead to more business be sure to document it during the evaluation process.
The best time to prepare for the sale of your business is at least three years before a sale. However, if you don’t have that kind of time, use the ideas above to present your business in the best light.
Jim Kahrs is the President and Founder of Prosperity Plus Management Consulting, Inc.
If you have any questions please don’t hesitate to call 631-782-7762 or email.