A Business That Has Value to Sell Will Be an Easy One to Keep

Have you ever had one of those days where you find yourself daydreaming about selling your business and riding off into the sunset? Me too (haha!). But, not every business sale produces a ride-off-into-the-sunset kind of return. Your business must have value to attract a buyer willing to pay you the big bucks. How do you know if your business will be desirable to a buyer?

Most buyers of businesses are looking to buy future cash flow. A knowledgeable buyer will look at your annual cash flow (aka the Seller’s Discretionary Earnings) and whether it is enough to repay the debt they will take on to purchase the business AND pay themselves a salary. Seller’s Discretionary Earnings is calculated by starting with the business’s Net Profit and then adding back owner-related and non-cash expenses.

In addition to the cash flow your business creates, potential buyers will also evaluate the qualitative factors. To name a few:

·  Does your business have a demonstrated history of profitability and cash flow?

·  Is the work performed by multiple people, or is the daily operation of the business dependent on you?

·  Does your business have concentration risk where most of your revenue comes from a few key customers?

Suppose your business’s daily operation depends on you, the business owner. In that case, it will have reduced value to a potential buyer unless you plan to continue as an employee of the new owner and continue to run the operation. Similarly, if your business is overly dependent on a few key customers, it will have reduced value to a potential buyer. I reviewed a business once that had 45% of its revenue coming from one key customer. If that key customer were to leave, the buyer would likely have a hard time repaying the loan they took to buy the business, making it less attractive to a buyer.

If you work toward answering these questions favorably about your business, it will be more valuable to a potential buyer. Simultaneously, creating these positive qualitative attributes in your business will make it more valuable to you! You will have a business desirable to a buyer and a business desirable to keep. What a powerful position to be in!

It is not uncommon for a business owner to reach out to me and inquire about the value of their business and selling when they are weary from the challenges in their business or they have just not been able to get over the hump to the profitability they desire. In other words, they hope a buyer will come along and pay for the problems they haven’t been able to solve. They are not selling their business from a place of strength and they are dependent on the value a strategic buyer places on the business if they can get their interest. But, the best position to be in for a lucrative sale is to have buyers begging to buy your valuable asset not begging the buyers to take it off your hands.

To get your business ready to sell you must start working to generate more cash flow and to remove yourself from the business’s daily activities. Pretty soon you’ll find you will have a money-making machine that requires minimal investment of your time. Hmm… your business doesn’t seem too bad to keep for yourself after all. Creating a valuable business won’t just give you a return on the sale, it will be an easy business to keep. Now that sounds like a good situation to be in! Whatever you choose, your valuable business can help you ride off into the sunset after all.

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