How to sell a business
The 1 , 2, 3 process.
The job of the business broker is to arrive at a most probable selling price (MPSP).
Here is the process:
- Start with the financial statements which the company files with CRA and normalize the net income to the cash flow the company can generate. This takes skill and knowledge of the company. What revenue can the company generate based on historical results, and other factors. Against this revenue that can be projected and proven to the buyer, you will deduct only the real expenses of earning this revenue and will exclude all remuneration to the owner, including any personal expenses that small business owner's write off for tax purposes.
- This first process is the most difficult and, with the expertise of the business broker, will determine what we call in our industry sellers discretionary earnings (SDE) which basically purifies the cash flow and comes up with a debt free cash flow figure. Ideally the seller would start planning before putting the company up for sale to maximize the sale proceeds. The higher the bottom line, the higher the selling price. Once we are comfortable with the SDE we will apply a multiple to the SDE to determine a most probable selling price (MPSP). Keep in mind that determining a selling price of a business is an art and not a science.
- A lot of professional judgment goes into the process.
The fun starts once that probable selling price is established.