How do you Know if it is Time to Value and Sell your business?
Is it time to value and sell your business? Selling and buying a business requires only one set of circumstances. There must be a motivated seller AND there must be a motivated buyer. Period.
If you have a motivated seller but an interested buyer the sale of the business will not happen. If you have a seller that wants to think about it and a buyer that’s motivated, then the sale of the business will not happen.
It is not unusual in the residential real estate market for it to be a buyers’ market as there are many houses on the market or a sellers’ market when there is a lack of inventory or houses available to buy.
It is unusual to have a buyers’ market or a sellers’ market for a privately held business as there are many more factors at play than just supply and demand or the amount of inventory. Some of these reasons include:
- Most buyers want to feel established before buying a business. That is, they don’t want to relocate and go through all the hassles of selling a house and then buying a house and then buying a business as all this change is disruptive. Most business buyers are therefore looking to buy a business close to where they currently live and they don’t have the interest to travel more than about 20 minutes to work as they know they will be spending a lot of time there.
- Almost all buyers start the buying process looking for the perfect business. Their criteria include proximity to where they live, an industry they know and understand, the value of the business in line with their investment criteria that includes their downpayment, and how much they expect the business to be making so it provides the total owner benefit they want from owning and operating a business. IF they can find a business that meets ALL these criteria, IF they aren’t truly motivated, they will keep looking as there will be something about the business they are looking to buy that isn’t quite right. For example, sales may be flat and not growing, too many employees, the rent is too high, the location is not quite right, the seller knows so much about the business and the industry the buyer feels intimidated and so the reasons go on.
- The above explains why only about 25% of businesses ever sell.
If you like statistics, then consider the following from BizBuySell.
From my perspective, statistics on the sale of a business can be misleading as there is a temptation, if you are a seller, to apply them to your situation while if you are a buyer, apply them to your situation. As I said above, there is only ONE set of circumstances for the sale of a business to close and that’s a motivated seller meeting a motivated buyer, and this includes all conditions of the sale fuller disclosed to both parties.
Sales of small businesses are the greatest since 2013
Per the graph below, the sale of privately held businesses for each quarter of 2017 was higher than the same quarter in 2014.
Median revenue and median cash flow of businesses sold
The graph below is interesting as it shows in 2017, the median revenue of businesses sold was approximately $500,000 while the median cash flow was approximately $120,000.
An interesting aside I have learned over the years is that business sellers put a great deal of weight on the gross revenue of their business. From my perspective, this is the wrong place to put a focus. The Net Income or Sellers Discretionary Earnings is much more important than the gross revenue of the business. Which business would you prefer to buy? The business making $1 million per year in gross revenue and losing $100,000 or the business making $1 million in gross revenue and the owner Net Income or SDE of $500,000?
Small businesses sold by the industry sector
This graph shows those businesses that sold and the industry they operated.
- 40% of businesses sold were in the service industry.
- 29% of businesses sold were in the restaurant industry.
- 18% of businesses sold were in the retail industry.
- 10% were in other industries and
- 3% were in manufacturing
Median Days on the Market for sold businesses
This graph shows that in 2017, the median number of days a business was on the market ranged from just over 180 days to a low of about 145 days.
Once again there is a need to be careful with median numbers as this doesn’t mean it will apply to your business if you decide to put it on the market to try and sell.
Value and sell your business – is it time?
If you are thinking of selling your business, is the time right to get it valued and put it on the market?
From my perspective that answer is simple.
If you are a motivated seller, then the time is right. It’s not an easy process at the best of times to sell nor indeed, buy a business. However, if you own a business and doing something else is more attractive to you than owning and operating your business then getting it valued and onto the market to see if there is a motivated buyer makes perfect sense to me.
The economy is doing well, the amount of taxes a business owner needs to pay has been lowered, and finance is readily available to a qualified buyer.
If you plan to sell, make sure your financial statements are accurate and up to date. Poor quality financial statements are the number one reason a buyer inquires and then walks away from completing the sale. A motivated buyer is simply not willing to accept financial statements that make them uncomfortable. I see this time and time again.
If you have questions about how to value and sell your business or the steps it takes to sell a business, send me an email or give me a call at (916) 570-2674.
