Selling Your Business – Calculating What You Get to Keep

Date: Mar 7, 2012
By: Jarrett Davidson

Who cares what you sell your business for?  How much of it do you get to keep?  This is the first in a three-part series explaining the math behind selling your company.

 Part 1 – Enterprise Value

Part 2 – Equity Value

Part 3 – Net Proceeds – Asset Sale vs. Share Sale

Enterprise Value

 The first building block in selling your company is estimating its value.

Enterprise Value is the total value of your business including all assets that are required for the operation of the business.

Enterprise Value is typically estimated based on the Net Present Value (“NPV”) of the expected after tax cash flow for the business.

Inputs to the NPV calculation include:

–        Earnings before interest, taxes, depreciation and amortization (“EBITDA”);

–        Adjustments to EBITDA to reflect sustainable cash flow for the business;

–        Expected growth rate(s) in adjusted EBITDA;

–        The estimate of the weighted average cost of capital (“WACC”) for like businesses based on appropriate levels of debt and equity and realistic return expectations on that capital;

–        The combined federal and provincial income tax rate;

–        Necessary capital expenditures to maintain this cash flow (usually assumed to at least equal depreciation).

Adjustments to EBITDA, as noted above, are typically required for owners’ compensation and any company owned real estate:

–        Owners’ salaries, benefits, draws and discretionary expenses are adjusted to necessary levels for the business and fair market pricing.

–        Any real estate in the business is typically valued based on a current appraisal and this value is over and above Enterprise Value of the operating business (the real estate may be acquired by the buyer for additional proceeds or retained by the owner).  EBITDA for the NPV calculation is then adjusted downward by an amount equal to the fair market rent estimate on the portion of the building that is owner occupied.

Enterprise Value is calculated based on the assumption that there is no interest bearing debt, as value of the operating business is independent of the current capital structure of the business.   This is why all interest costs are added back to the cash flow in the valuation calculation.

Surplus cash or other assets that are redundant to normal business operations represent value in excess of Enterprise Value that would typically be stripped out by the owner.

It is important to note here that Enterprise Value is independent of a sale of shares or of assets; it is simply the value of the operating business.

Lesson learned

Business Value   = + Enterprise Value of operating business based on NPV of adjusted after tax cash flow+ Value of company owned real estate

+ Cash and other redundant assets


In Part 2, we will explore the next important step of determining Equity Value from Business Value.  This is the frequently confusing world of determining how interest bearing debt, any working capital adjustment, owner bonuses payable, related party loans, preferred shares and common shares play a role in the pre-tax estimate of how much cash will be left in your jeans at the end of a sale.

Then Part 3 in the series will examine the tax, transaction and value implications of an Asset Sale vs. a Share Sale; the final piece in the puzzle of what you get to keep.

Our Corporate Finance team can help you figure out this math and present it to you in a language you can understand.  We promise.  Why?  Because we are business owners, too.

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