When you sell your business, there’s a difference between “what you want” and “the market.”
These phrases are related but different, much like a P&L statement and balance sheet are related but different. In conversations with sellers, I ask what do they think their business is worth, and they will tell me an amount. I then ask how they came up with that number. The answer I often get is “That’s what I need.”
As with residential real estate, a buyer will not pay more for a similar property in the same area and with the same configuration. This principle also applies to establishing value for a business by comparison with something like the one being sold, including, most importantly, cash flow. It has nothing to do with what the seller may “need.”
When a seller uses what he or she “needs” to establish the price, the seller is being delusional and, most likely, will be in the group of the 90% businesses that don’t sell. There is a clear disconnect with reality. The main reason 90% of businesses don’t sell is they are over-priced, don’t provide full disclosure in the offering or have poor accounting records.
From a small business to a $20 million transaction, the principles are the same, unless there is something unique about your business, such as extraordinary year-over-year high growth with a high margin. Businesses with more than $1 to $3 million cash flow are also special, particularly if the customers are “sticky” – that is, they are repeat customers that will stick with the business once it’s sold.
A sole proprietor or a sophisticated private equity company makes the same comparisons with other similar businesses that have the same approximate cash flow/owner benefit after earnings have been normalized. That is essentially the amount of money the buyer could take out of the business before debt service, which establishes the primary basis for the price.
There are many factors to consider, including customer concentration, age of the business and current trend of the business, to name a few.
As a seller, it is smart to work with an intermediary or business broker who will talk straight with you. You don’t want someone telling you what you want to hear; you need someone with experience and knowledge of the market.
Whether you’re a seller or a buyer, if you would like a confidential conversation about how to prepare, contact me on my cell, 954-579-4687, or by e-mail at firstname.lastname@example.org. My LinkedIn profile is at http://www.linkedin.com/in/dolansales.