What Impacts the Selling Price of a Business for Sale

2misi.com

http://www.2misi.com/article/2012/06/what-impacts-the-selling-price-of-a-business-for-sale

There is a lot to consider when you sell a business. The final purchase price and deal terms are impacted by many different factors that a buyer, and ultimately the "market", will consider.

Recent Performance

Over the past 2-3 years is the business growing, flat, or declining?

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.

The Buyer Pool

ust 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.

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. 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.

Customer Concentration

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. 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.