When entrepreneurs come to me for advice, I tell them to keep two things in mind. One, always build a business to last forever. In other words, no shortcuts. Do what's best for the business long term. And two, build the business so that it can be sold for as much money as possible--even if selling is not part of the plan. Building this way will force you to adopt best practices, by which I mean practices that produce the best performance--like minimizing what you take out of your business and instead using that money to grow.
Unfortunately, most entrepreneurs don't follow these precepts. Very few businesses get the best price when they're sold. Often a company is worth so little, its owners are better off not selling.
For example, a married couple I know--I'll call them Hannah and Ted--are in their early 60s and have a company that rewires offices to permit the use of the latest technology. It's more than 30 years old, and has about $4 million a year in sales. They asked my advice about selling.
We started by talking about the business, their roles in it, what they liked, what they didn't like, their outside lives, their employees, and so on. They wanted to know what I thought their company was worth. I couldn't say for sure, but businesses are valued on the basis of a multiple of earnings before interest, taxes, depreciation, and amortization, or EBITDA. With a little research, they could find out the current multiple for a company like theirs. I guessed they might get as much as $4 million for it.
Wow, that's a lot of money, they said. "Well, not necessarily," I said. "You have to subtract debts. You'll also have selling costs and taxes. You may want to reward key employees. How much do you take out of the business?"
