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Sell the Business: What Price?

by markheitner

With so many other things to keep track of when selling a
business it's hard to keep in mind all of the factors that will
affect purchase price and deal terms.  Below I highlight and
discuss some of the most important factors.

Recent Performance:

Over the past 2-3 years is the business growing, flat, or
declining? For example, "Business A" made $200,000 last year and
$100,000 the year before. "Business B" made the same $200,000
last year, but $300,000 in the year prior.  In almost every case,
Business A is worth far more in the eyes of an individual buyer.
They want to acquire a business that is growing, or, at the very
least, is stable.

Ease of Transition:

Interestingly enough, most small business buyers will purchase a
business outside of their area of expertise or experience. As
such, it is important that the transitional period after the sale
is something that the buyer sees as being reasonable.

A buyer must feel confident they'll be able to have a good grasp
of things within a short time after they take over. This can only
be accomplished if the business is well managed with policies,
procedures and systems in place. If you want to know how easily
the business will transition to a new owner, ask yourself the
following question: "If I get hit by a cement truck today, what
will happen to the business tomorrow?" For example, if the seller
possess highly specialized skills that are critical to the
business, or if the seller has long-standing personal
relationships with clients that drive the sales, then these will
be obstacles to a successful transition.

The Buyer Pool

Just like the transition period, there is a direct correlation
between the purchase price of a business and the ease in which
someone new can operate it. In the market, there are tons of
people always looking to acquire a business. The greater the
amount of those people who can see themselves running the
business, the more demand there will be for the business, and
therefore the higher the price and the better the terms a seller
can get. If a business simply requires good all around
business/management skills, then the buyer pool will be quite
large.

Conversely, if highly specialized or certified skills/licenses
are required to operate the business, the number of potential
individual buyers shrinks drastically. In extreme cases, a seller
may have to think about a strategic sale to someone in the
industry.

Books and Records:

I cannot emphasize enough the importance of having good, clean
and accurate books and records. It may very well be the single
most important influencing factor of the price and terms when a
business is for sale. There is no quicker way to "kill a deal"
than having the buyer learn that the actual company records are
not in line with what was originally represented. It is terribly
upsetting when a deal falls apart, and though some may be
salvaged, when it's due to poor financial records often times the
buyer will be: "out the door, see no more."

Another aspect is unreported income. If you are taking in cash
sales and not reporting it, then you cannot expect to be paid for
it when the time comes to sell the business - you can"t dance at
all the weddings. If you had the benefit of not paying taxes for
years on this money, and you have no quantifiable means to prove
the number, then surely you cannot expect anyone to pay you
anything, let alone a premium for this "alleged" revenue.

Typically, a seller wants to have this factored into the price.
However, one must consider the provability of this unreported
income. The questions becomes:

* Can you prove it?
 * How?
 * Do you even want to prove it?

You may want to be very cautious about this situation.

Having said all this, there is a way for you get the best of
both worlds, as long as you're willing to make a small,
short-term sacrifice. As soon as you decide to sell a business,
start putting all the income on the books. The average business
will sell in 7 - 8 months. During that time you can demonstrate
to any buyer the increase in the top line revenue when you
reported all the income. The difference in the selling price can
be significant. More importantly however; it can be undeniable
proof and full validation of your claim although you may need to
agree to structure this portion as an earnout in order for the
buyer to feel comfortable.

Customer Concentration:

Back to our example of Business A and B. Both companies
generated the same profit to the owner for the past two years.
Business A has one hundred clients, none of which represent more
than five percent of the revenues. Business B has the same
hundred clients, but two of them contribute forty percent of the
revenue. Which company is worth more? Business A of course! If
one or two of Business B's clients stop buying, the business
could decline by almost half.

Exclusive Products or Services

If there is an element of exclusivity to the business, whether
in product or territory, this can be a huge selling factor.
Naturally, the buyer will want to see this transition to them and
so you need to consider this situation. For example, in a
distribution business that has an exclusive territory, it will be
paramount (and definitely a deal contingency) that the
relationship with a particular supplier for example will
continue. Conversely, if the entire business relies on this
relationship, it can hurt you. It's the supplier version of
customer concentration. However, if the relationship is solid and
a new contract will be granted to a buyer, it can be worth a
premium in the sales price.

Recurring Revenue

Any business with a strong recurring revenue base is both highly
sought after and will almost always command a premium. Examples
are alarm monitoring companies, marinas, self storage facilities,
and some pest control businesses. The lure is that a new buyer is
almost assured of continuity and can count on revenue from day
one. If any part of your business has a recurring revenue
component, then play it up. If not, think about ways that you can
possibly generate some; it will be well worth the effort and
expense to do so.

Mark Heitner, MD, MBA, the founder of <a
href="http://www.midmex.com">MidMEx</a>, is a psychiatrist,
author and software developer. Many patients have been owners of
mid-sized companies with a <a
href="http://www.midmex.com">business for sale</a>. MidMEx helps
sellers by creating a supportive community of verified buyers and
expert business appraisers, brokers and attorneys. Many resources
are available to help owners <a href="http://www.midmex.com">sell
the business</a>.

Syndicated by Top Gazebos - www.topgazebos.net

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