How do you price your business for sale?

A lot of business owners have no idea what their business is worth. As a former business broker, I ran into the gamut of people that were ignorant of their business value.

The answer, of course, is that a business is worth what a willing and able buyer will pay a willing and able seller.

However, there are some objective factors to consider. If you are a small business (under $1 million in sales per year) the typical way to consider pricing is using Sellers Discretionary Earnings (SDE). SDE is defined as your net profit PLUS your salary. The value is between 1 to 3 times SDE.

Why the variation? If you have an established business with a large number of buyers that use your services or products regularly, you have a fairly stable business. If you have a company that has a limited number of customers, and your product is based on ever changing technology...you could be obsolete in a month.

Larger businesses, up to $30,000,000 in annual sales, use a different method. They look at Earning before interest, taxes, depreciation and amortization, or EBITDA. In those cases, the selling price is typically three to five times EBITDA.

There is also the issue of owner expertise. If you have a unique skill set or knowledge base that takes years to acquire, your business is limited to buyers that have your same knowledge and skills. You can train a key employee to learn your skills, and have them be included in the purchase. The downside, of course, is that if they acquire the skills, and they are entrepreneurial, they might decide to open their own business, or take the skills that you paid to teach them, and go to a competitor.

These are options for selling your business if it is profitable. What if your company is NOT profitable?

If you have assets, you can do an asset sale. You can sell the assets for pennies on the dollar. If you are purchasing assets, you can purchase the assets in an equity purchase, for pennies on the dollar, and do a firesale of the assets that you don't want, and keep the ones that you do want. It was done in the 80's for corporations and acquired a bad reputation, but it is a perfectly valid manner of increasing your wealth.

If your company has business assets, can you "partner" with another company that is having financial difficulty, to save your business, and theirs?

Example: If you collect your customers name and phone numbers, and have a good relationship with them, can you send a mailer to them offering bundled discounts on your business, as well as the services of another business? Can you sell your mailing list to another company? Can you do a Point of sale referral to other businesses so that every purchase includes a coupon to another company? Can you sell these services to another company to increase your volume and/or keep your company afloat? (It must be a compatible business.)

If your company has unused assets, can they be sold for cash, trade, or services to cut your expenses and raise revenue? (Do you own an empty warehouse that you are not using, or need in the near future?) Can you sell it, or lease it to another business?

Don't trust their books! As a business broker, I discovered that some sellers were lying cheats. They had one set of books for the IRS, one set of books for themselves, and another set of books for their partners. Obviously, I would not trust a thing that these people said. If you are selling a business, you should have accurate and honest records. It is too great of a liability for you to fudge the books. I always told my sellers that I don't care WHAT they actually made, the only books that we would use would be the ones that they shared with the IRS.

If you are thinking of selling your business in the near future, proper record keeping and honest accounting are a pre-requisite, and your accounting system must be easily accessible to potential buyers (after they have signed a non-disclosure agreement).

In summary; if you are wanting to sell, you must show profits, or be prepared to take a huge loss. The more open and transparent your accounting system, the more money you will receive, and the more transferable your business, the easier it will be to sell.