Mainebiz

W W W. M A I N E B I Z . B I Z 29 A P R I L 2 0 , 2 0 1 5 Typically, Adams says, the higher the EBITDA, the higher the sale price. With smaller companies, the value indicators often tend to be of lower quality than they are for much-larger fi rms. at can signal to potential buyers that it might be harder to get a good return on their investment and may result in a lower sale price than the seller would have preferred. Adams says prospective sellers in the low-end of the middle-market businesses can often feel paralyzed by uncertainty over whether it's the right time to sell, and related questions such as: How do they know if they're pricing the business too low and leaving money on the table if they quickly sell it for that price? Is it priced too high, risking a long wait for a buyer and the possibility of holding onto the business too long? In fi rst meetings with potential cli- ents, Adams encourages them to tell the story of their business: Its chal- lenges and achievements. How they came into the business. eir reasons for selling. eir exit aspirations, and what their hopes might be for other family members and employees. His goal is to help the owner step back in a refl ective way and get a sense of where they are and where they want to go. A picture emerges that invari- ably helps that owner know what they want to achieve. "People want to tell you their story," he says. "It's critical to under- standing how you might help some- one achieve their goals." Since for most owners their business is the pri- mary source of their wealth — "stored value" is how Adams refers to it — the decision to sell invariably is tied to the question "How much can I sell it for?" Getting the right price If an owner wants to sell and hires CFA to help with the process, Adams says the next steps typically involve defi ning the exit (e.g., deciding whether to sell to partners, strate- gic buyers, an investor, competitors, international buyers or transferring it to family, management or employ- ees) and setting goals, such as the likely range of pricing, terms and deal structure in the current market, as well as tax strategies and legacy objec- tives. "We're prepared to help business owners sell their business based on nhdlaw.com • Portland (207) 774-7000 • Lewiston (207) 777-5200 When it comes to legal issues for your business—or personal life— you can trust in our expertise, experience, and results-oriented focus. • Estate Planning • Commercial Litigation • Corporate Law • Intellectual Property • Real Estate Law • Tax Planning Prepared. BE C O N T I N U E D O N F O L L OW I N G PA G E » E BITDA, which stands for "earnings before interest, taxes and amortiza- tion," is a critical number when measuring the value of a business when an owner is thinking of selling. That's because a buyer will want to know how much "free cash" there is and pay a purchase price that is a multiple of that. Adding discretionary or one-time expenses that a buyer would not pay if he or she owned the company is a way of adjusting the EBITDA to create a more favorable sales price. Here's a hypothetical case study: ACME Co. has annual sales of $2.5 million and a net income of $200,000. Its EBITDA would look like this: Total sales Net income (8% of sales) $2,500,000 $200,000 Interest expense $10,000 Taxes $20,000 Depreciation $5,000 Amortization $5,000 EBITDA $240,000 Adjustments Owner's distribution $50,000 Country club dues $5,000 New ACME labeling machine $7,500 Adjusted EBITDA $302,500 Impact of 'free cash' on market value The difference is important because if a buyer pays a 3X multiple of the adjusted EBITDA instead of the simple EBITDA, the seller receives $907,500 instead of $720,000 — or $187,500 more in the company buyout. Lesson: Maximizing EBITDA is important. S O U R C E : Corporate Finance Associates

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