If we had a dime for every time a business owner who told us they wanted to get a million dollars (or five or ten) for their business…well, we’d have a LOT of dimes!
While we would love to sell every small, main street business out there for this nice, round figure, often times there is more of a psychological component to this “magic number” than anything rooted in financial metrics. Unfortunately, a buyer doesn’t care how much you need to retire, how much debt you have, or even how much revenue you are putting on the top line…they care about cash flow, and the more the better.
Every industry has best practices, standard margins, average inventory, normal turnover rates, typical staffing models, etc. that are used for benchmarking purposes. Every industry also has multiples of cash flow that buyers are willing to pay if they want to acquire it. Once we have recasted the financials (a process of stripping out non-cash and seller discretionary items), we look at comparable transactions to see what buyers have actually paid for similar businesses. This is one of three highly accurate methods of predicting a likely selling price for a business.
We know that selling a small business is an emotional time. Owners have usually shed their blood, sweat, and tears on it and so it’s understandable when people think (or hope?) their business is worth more than it really is. They want to talk about the potential, the future market, or any number of circumstances that haven’t yet come to pass to justify a higher asking price. We get it. We really do. Just keep in mind that our motivation is to price the business exactly where it needs to be. If we price it too low, we ALL leave money on the table. If we price it too high, we’re working for free because it just won’t sell.
At the end of the day, we need to have a confidential conversation and value the business to find out what it’s truly worth. Over the last 10 years, our valuations have proven to be accurate +/-3% when compared to actual sale prices. Try to enter the process with an open mind and resist the temptation to get a number stuck in your head prematurely. If it’s not worth what you’d hoped, we will have a very in-depth conversation about what you can do to get it there. We recommend getting your business valued about five years before you’re ready to sell so that you have time to make changes and increase the value. Contact us today to start the conversation.