Jessica Fialkovich is the co-founder and CEO of Exit Factor, which teaches entrepreneurs how to buy, build, and sell their small to medium size businesses. She is a business expert, author, speaker, and small business advocate. When Jessica sold her first business about a decade ago, she had no idea where to start. Fortunately, she could exit successfully and buy her next company, which was a business brokerage office. Over the next 10 years, she built the fastest-growing and most successful business brokerage firm in the United States. There are three regional brokerage firm offices of their business and about 40 different brokers that work for them.
Jessica realized that most business owners who decide to sell are not necessarily prepared to do so and she decided to pull back the curtain on how businesses sell their processes and to give buyers and sellers the tools to successfully and profitably complete a transaction. When you work with a generalist who has different industry experiences, they have so much more creativity in those deal structures and how to get businesses sold for maximum value.
There are two completely opposite sides of the spectrum of expectations when valuing your business and one big misconception is that people often overvalue their company, because of wrong information they may find on the internet. Jessica believes you have to look at the dynamics of every business to understand what the value is and then compare it to what’s actually going on in the market. Another misconception is that people also undervalue or feel like their businesses aren’t sellable, and the truth is that very small businesses sell every year by the thousands.
Look at the market method similar to how you would do a housing analysis. There are databases of private sales across small and midsize businesses. Seeing what businesses are selling in that industry, most of those valuations are based on a multiple of earnings or multiple EBITDA. A business is worth between one and four times EBITDA as a quantitative piece, looking at how much EBITDA is in any company, will give you a formula that makes it easy to calculate the quantity.
The harder thing to do is to measure the quality. Going into different areas of the business, like how it’s run, how involved the owner is, what the structure is in terms of products and services, whether there is recurring revenue, and what’s the growth potential. Through Jessica’s company Exit Factor, they’ve identified 12 different areas that dictate a qualitative score of what buyers are willing to pay.
No matter how you slice and dice your company, ultimately buyers are focused on how much money the business makes, and how much profit there is. Maximizing its earnings, maximizing efficiency, not focusing so much on driving revenue growth or building the right business, but refocusing on driving profitability will ultimately maximize the value. Another big factor is to have processes and procedures in place, contracts between employees or clients, and books and records in order. Buyers are going to inspect those in due diligence. This makes the transaction run smoother and might double what your business was originally valued at.
In this episode:
[01:31] Jessica explains how she became a successful entrepreneur
- How her family exited their businesses successfully and set the family up for the future
- Pulling back the curtain on how businesses sell their processes
[04:38] Giving you an idea of the reality of a situation when it comes to business values
- The big misconception when people overvalue their company
- When people undervalue or feel like their businesses aren’t sellable
[06:35] When looking out to sell a business and figuring out the valuation
- Formulating the valuations based on a multiple of earnings or a multiple of Ebitda
- Identifying 12 areas that dictate a qualitative score of what buyers are willing to pay
[08:34] Jessica gives an example of when a company was sold for a surprising amount
- Buyers look for sellable assets that they can turn a profit on in the future
- Numbers to one person don’t necessarily mean the same thing to another
[11:11] Start with the earnings of a business when you are evaluating it
- Ultimately buyers are focused on how much profit the business makes
- Refocus on driving profitability which will ultimately maximize the value
[13:08] Having processes and procedures in place when thinking of selling your business
- Getting contracts between employees or clients, books, and records in order
- Jessica gives an example of guiding a business to double their value