How much you should sell your business for will depend on a variety of factors, from the industry you’re operating in, the annual sales you command, or the profits your business makes per quarter. Whether you’re a small business looking to sell to avoid shutting down, or a large business looking to make a tidy profit from the sale, these tips can help you determine what to sell the business for in order to maximize your sale profits. Keep reading to learn how much you should sell your business for.
Annual sales is a factor that you can base your sale price on. The annual sales your business commands can be a good indicator of your business’s success, and thus, what it may be worth on the open market. Obviously, a buyer isn’t exactly looking for a failing business (though some investors specialize in such), so if you’ve got a strong annual sales number, you’re more alluring than a business that does not.
The value of the business based on sales is calculated by a multiplier. This is usually about twice the annual sales, but if the business experiences any consistent growth or significant changes, it can multiply further and make the business worth more. The higher the risk that your business comes with, the lower the multiplier will be.
An investor won’t want to invest twice what the business brings in annually if there is much risk associated with it. Risk can be anything from the danger of your industry to the fickle nature of your clients; anything that may have a negative effect on those annual sales numbers.
Another consideration for when you’re selling your business is your profits. Don’t mistake profits for annual sales, as the two are completely different despite being linked. Annual sales is simply a measure of how many products or services you’re selling per year and the gross profits. Before you subtract any expenses, you’ve got your gross number, and, once you’ve accounted for everything including labor, rent, insurance, and other business expenses, you’ve got a net profit.
A profitable business is attractive to an investor because it’s already making more money than it needs to stay open. A profitable business is always going to be more valuable than one that only breaks even or is losing money, for obvious reasons. When you’re using this method to value a business, you’ll need to create a future projection of profits.
Can the profits your business is turning continue to grow into the future? What will they look like five years from now? The buyer will likely want to know if spending the money is worth it in the long run.
Consider the Positive and Negative Aspects of the Business
Do you operate in a particular risk industry? Is your business at the mercy of such things as the stock market or other factors? What are the positive aspects of your business? A buyer will likely want to know what the strengths and weaknesses are of your business, and will consider things like your customer base and the business’s performance over the last few years. Since the investor is making an investment for the long-term, they’ll want to know the ins and outs of the business’s successes or failures.
“How do I sell my business quickly?” you might be asking. The fastest way to do so is by choosing a broker and having a good plan. You’ll also want to be well-aware of all the details of your business’s operations and financial successes (or failures).
Check Similar Organizations on the Market
There are likely other businesses in your industry that are also up for sale, which can offer you some helpful insight into correctly pricing your business for sale. Look at the business’ success over the last few years, its profits and assets, and how the asking price has changed while on the market. Consider whether or not the market has been relatively dry as far as sales go, as this can tell you that now may not be the right time to sell the business.
Other businesses, of course, won’t be exactly like yours, but looking at the market can help you find a good starting place for your asking price. A broker can also help if you’re having trouble figuring out a price by yourself.
Consider Expenses and Debt
Your business’s expenses and any outstanding debt will be factored into the sale, and some investors won’t bother investing in a business that’s already knee-deep in debt. If you’re looking to sell your business, but you’re struggling with business debts, you’re going to have trouble attracting the offer you’re looking for. It’s simply not profitable to take on a business’s pre-existing debts.
Your expenses will also make a difference in the asking price. A business with many expenses will be less profitable, and therefore, less attractive to potential buyers. Remember that you’re selling to someone who is looking to make money, so you can’t exactly sell a business that’s on its way under (unless your investor is looking specifically for a purchase like that).