You must realize that a small business must grow. If the buyer or owner can’t find a way to grow the business, it will go down the drain. On the other hand, if the business can show a history of growth, it can be sold for a tidy sum.
Most owners want to grow their business, but few truly understand their financial statements and balance sheets. These documents contain many hidden guidelines that can direct the owner toward proper management. Sit down with your accountant; read some books that cover the subject and you’ll be a step ahead.
If you are buying a small, growing successful business, don’t worry about being “original.” Do exactly what the seller has done-even if it doesn’t make sense to you. I once sold a tire store where the seller had a ten foot tall stack of tires. It was braced from the inside not to fall over. He had a young boy sitting on top. It attracted the attention of most motorists and brought in business. But the new owner thought it was tacky. He discontinued it and his business traffic steadily declined.
There is a glaring error many small business owners make. It’s not declaring cash sales. Sure, some tax-free money-but it comes back to bite where it hurts. It devalues the business because a selling price is based upon the profit and cash flow. Trying to prove to a potential new owner how much cash you steal from Uncle Sam is dangerous and could result in an unwanted vacation-behind bars. Buyers are not going to consider that money in evaluating your business. Consider it money you have already been paid for your business.
When buying a business (or selling one), you need a competent broker. Not one who is an expert at “listing” businesses. A broker who has 20 to 25 good listings is better than one with a few hundred. Typically, brokers with hundreds of listings advertise only what their sellers tell them-complete with disclaimers. They don’t take the time to analyze the business themselves. Effective brokers will develop “adjusted” or “reconstructed” income statements that, after verification, put their client’s business on the same plane as others regardless of how the owner takes out the profits. It adds back to the bottom cash flow line such items as non-recurring, extraordinary expenses, interest payments, owner’s compensation as well as all expenses not actually necessary to operating the business. Make sense?
You’ll find most of the multi-listing business brokers advertising the actual name of the business for sale. Not a good practice. How would you feel-or what would you do if you saw the firm you worked for was on the sales block?
There are three ways to price a business.
1) Price it FOR SALE.
2) Price it to SELL FAST Or
3) PRICE IT RIGHT.
Keep in mind that the selling price of a business is based upon the discretionary cash flow being adequate to service the purchase money note you carry plus interest, and to provide the buyer with a living wage.