David Barnett is a prolific author and he has released a new book, How to Sell My Own Business. The book is a very specific answer to the problem business owners face when they’re ready to move on. The book details the process of selling a small business. In this episode we cover 4 main themes:
- Valuation methods including a great definition of goodwill
- Seller’s Discretionary Earnings and it’s impact on the sale price of your business
- Setting the buyer up to fall in love with the business
- Not hiding problems to give the buyer some things to fix (and make more money!)
David’s latest book, “How to sell my own business” covers the business sale process and gives a formula for doing it yourself. David’s background as as business broker means he has all the knowledge to help you sell your business or choose a broker wisely.
Business owners who decide to sell need to realize that an important part of a sale is the vendor financing component. Vendor financing actually reduces the risk for both parties in a sale!
The definition of goodwill in a business sale context is the sale price minus the assets, which has always confused me. David’s definition is easier to swallow – it’s the value of the customers! This portion of the sale price is nearly always vendor financed because the bank is willing to lend against assets but rarely against goodwill.
Larger businesses are often valued on earnings before interest, tax, depreciation and amortization (EBITDA) but this number is misleading for smaller businesses. Smaller businesses are valued based on Seller’s Discretionary Earnings, which is the dollar figure business owners extract from the business in value. A business broker can arrive at this figure through a process of normalization which is detailed in David’s book.
A takeaway from our conversation for me was the idea of running your business cleanly. This means avoiding any illegitimate expenses – ‘Friday night consulting’ – as Dave puts it! Adding any extra expenses into the business means your financial statements show you as less profitable. This means you will ultimately have to vendor finance more of the business as the buyer will have less financing available since the financial statements show a lower profit.
David’s tip on the sales process was gold – when you’re talking with the buyer, keep them focused on the vision of them being the owner, and their day to day activities. If they ask a question about numbers, refer them to the financial statements that they will receive after the meeting. This keeps them out of analytical mode!
Grab a copy of Dave’s book here. You’ll learn a TON and help keep the lights on with this podcast too!