Have you ever walked into the doctor’s office with nothing more than a cough only to walk out with a list of diagnoses and prescriptions so long you’ll need a speech therapist if you ever hope to pronounce them? Many entrepreneurs feel similarly when they first begin looking into exit planning.
If you want to sell your company for big money, there are a few terms you need to familiarize yourself with first. Here are the top six terms to help you talk the talk of exit planning.
1) Fair Market Value
- Fair market value is the price your company would likely sell for in a hypothetical situation. To get a fair market valuation from a CPA, you can expect to spend somewhere between $5,000 and $20,000. Unless you’re faced with estate planning, gifting, or divorce, you shouldn’t spend your money on a fair market valuation.
2) Open Market Value
- Unlike the fair market value, the open market value is a real-world valuation. It determines what your company would bring in on the market today, taking into consideration its strengths and weaknesses, the state of the M&A market, the state of the economy, and other variables. This is what you need if you’re serious about exit planning. Bonus: It costs less than a fair market valuation!
- Your EBITDA should be your number-one priority as you begin planning your exit. It refers to your company’s earnings before interest, taxes, depreciation, and amortization. Potential buyers will use your EBITDA to compare your company’s profitability with others’ on the market.
- Your multiple is a ratio of the total value of your enterprise to your EBITDA. When a potential buyer looks at purchasing your company, they will want to pay for your company’s potential earnings balanced with the risk that they will not get the required rate of return. The sale price that reflects that blend of earnings and risk is stated as a multiple of your EBITDA.
5) Certified Financial Planner™
- Before you begin planning your exit, make sure you have a CERTIFIED FINANCIAL PLANNER™ professional on your team. CFP professionals will handle everything from investing and taxes to insurance to estate planning and charitable giving—and more. CFP professionals go through rigorous training and testing standards to receive their designation.
- GAAP refers to generally accepted accounting principals. GAAP is strict on certain items such as inventory costs, payables, and bad debt write-offs. When you’re in the process of a sale, your books will be audited on GAAP, so be sure to perform an internal audit using GAAP in advance of the sale. This will ensure that you and your future buyer are on the same page.