It is understandable that you may have an emotional attachment to your company.
Factors such as how much you enjoy running the place, your relationship with your employees or the prestige you have in the community may be some of the things you value the most about your business.
But it's important to realize buyers are going to judge your business based on facts - things that they can see in writing. A business buyer will have no history with your business and no sentimental feelings towards it.
The strongest emotion they will feel is fear. They will fear making a mistake such as buying a weak business or paying too much. They will fear getting taken by a dishonest seller.
No business is perfect, but if you can show a buyer that your business can provide most to the items listed below you will have a good chance of selling your business at a good price.
Sales & Profits That Can Be Proven
Above all else, buyers want to see how much cash your business generates. Ultimately, the buyer is interested in how much cash the business will make in the future - but that's impossible to predict exactly, so buyers will value your business on it's historical financial performance. You should prepare financial statements for the last three years.
Ideally, you will be able to show that sales and profits have been trending up in recent years. If the trend has been downward you can expect the buyer to value your business accordingly.
While the historical financial statements are the primary information used to value the business, you can still provide projected financial statements that show how the business can be expected to perform in the future.
The Price Is Right
"At this asking price, can I service the debt I will need to take on, plus pay myself a reasonable salary, plus have some money leftover to put back into growing the business?"
Whatever price and terms you and the buyer agree to, the buyer will need to be able to answer "yes" to all of these questions or the deal won't work.
What is a "reasonable salary" for one person may be completely inadequate for another who has a different lifestyle and financial obligations. So the issue is not just: "Is the business priced correctly?", but "Is this price workable for this particular buyer with their needs and financial situation?"
The Future Is Bright
Also, when it comes to price, the buyer wants to know that the business can continue to perform at a level that justifies the price. Your business' past performance may look great on paper but how will it do in the future with a new owner? Buyers fear that things may change once they take over and they will be looking for red flags that indicate the business may be headed for trouble.
Some things a buyer will look for are:
- An unusually large percentage of sales come from just one customer - A buyer will worry about what will happen if this customer goes out of business or starts buying from a competitor.
- The business is overly dependent on you, the seller, for it's success - If your customers buy from you because of your long term personal relationship with them, a buyer will view this a negative. If your name is on the sign out front and everyone in your industry associates your business with you personally, you will need to show the buyer that an entire organization is in place and can operate independently of you.
- The business is part of a trend that has come and gone - Video rental stores used to be a hot item for the small business owner, today BlockBuster and Netflix have made them almost obsolete. If you started your business to cash in a hot trend that has run its course you may still be able to sell the business but you will need to price it accordingly.
The selling price of a small business is based on its historical performance, but a buyer will choose which business to buy based on their assessment of its future performance.
A Desirable Location That Can Be Taken Over By The Buyer
If your business is operated out of a leased facility, and the location is part of it's value and appeal, buyers will be interested in the details of your lease. In addition to reasonable rent, buyers will want to see how much time is left until the lease expires and if there are any options to extend.
Equally important is determining if the lease is transferable.
It's common for landlords to include a clause in the lease that prevents you from assigning it to a new owner without the landlord's approval.
The better the terms of your current lease, the more likely a landlord will want to negotiate a new lease with your buyer. If your lease does require the landlord's approval to transfer, you may want to negotiate a new lease now with updated terms that your buyer can automatically assume.
Many small business sales have fallen through at the last minute because the landlord refused to give the buyer the same lease terms that the seller had enjoyed.
The Assets Have Real World Value
Are the tools, machinery and vehicles in good working condition or are they past due for repairs or replacement? Is the inventory at the same level as when you last valued it or will the owner need to make an immediate investment to get the inventory up to adequate levels? Does the current inventory match the current market demand or is it's value over-inflated by lots of obsolete and un-sellable merchandise.
That these hard assets exist is one thing, but the buyer wants to see that they have actual value.
This doesn't mean no competition or only weak competition. If the business is in a growing industry it will always have some type of competition.
In fact, a lack of competition could be viewed as a negative: If you have been doing a certain amount of sales with no competition, the buyer will wonder what will happen if a new competitor comes along - and if you are in a growing field or a good neighborhood, competition of some sort will come along.
Better to show that you have been successful all these years in spite of the competition.
About the author:John M. Caviness is a marketing manager at Meowessay. This job gives him an opportunity to express his opinion and thoughts on different topics.