Buying or selling a business? How much is it worth?

Lockdowns, inventory disruptions, staffing issues and cash-flow challenges have sapped many entrepreneurs of their passion

David FullerThe economic climate has changed the way business owners think about their businesses. While my firm worked with companies before the pandemic, helping them to prepare their businesses for transition, there seems to be a flurry of interest from owners ready to exit their businesses.

There are several reasons why people are thinking of selling or closing their businesses now, and there are several underlying factors.

Given the current uncertainty, owning a business brings considerable stress. While the economy seems poised to return to normal, the last couple of years have definitely put a strain on the mental well-being of business owners in a number of sectors. Lockdowns, inventory disruptions, staffing issues and cash-flow challenges have put out the fire that many entrepreneurs had for their businesses.

Age is also a factor in selling businesses. Many baby boomers are entering the last few years of their careers – pandemic or not, they would have been more than ready to sell their business and retire. Unfortunately, not many of these boomers could have predicted the events of the past year and how it would impact their lives. They may have chosen to sell earlier had they been able to see the future.

In addition to those who want to get out because business has taken a downturn, some people have had their best business years ever. Their business has boomed because of the economic changes, and there’s no better time to sell your business than when your sales are at their peak.

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So how much is a business worth?

According to John Warrillow, author of the book Built to Sell, the average business sells for slightly over 3.5 times its net earnings.

Last fall, we developed a prospectus for an owner who wanted to sell his business. He was in a specialized sector and believed he could get $3 million to $5 million from a national company. I had serious doubts about his pricing because the value he was attributing to the business reflected 40 to 70 times its net earnings.

After shopping his company around, the owner got back to us 10 months later and said he was offered $300,000 to $500,000 for his business. He figured he might as well keep the company, which was making him $70,000 a year for little involvement.

A number of factors affect company value, the most important being the profitability of the business and the value of its assets.

Businesses typically sell as an asset – a buyer purchases those things the business owns, including land, inventory, fixtures and other assets.

Share sales happen when owners sell their shares in the business. Typically, owners prefer to sell the shares in the company because there are tax advantages doing it this way. A share sale normally includes all the assets and liabilities of a company. These tend to be more complex and can take longer to complete.

Buyers usually prefer to buy assets rather than shares because there are risks to buying a company where you might be unsure of potential debtors or litigation.

In addition to profit, buyers look for the ability to grow the company. If there’s little opportunity for growth, the value of the business is limited.

In addition, buyers will want a company that’s not reliant on the owner for its success and has systems in place to make operations simple. In my book Profit Yourself Healthy, I devote a whole chapter to people who are ready to move on (email me for a free digital copy of the book).

Valuing a business can be tricky. And without realizing some value, most business owners won’t have enough for retirement.

According to a Canadian Federation of Independent Business study, the pandemic has caused 42 per cent of business owners to postpone retirement. The average small business has $170,000 in debt and some owners worry they will never recover from the additional debt load.

Owners need to be concerned about their retirement and they need a plan that lets them retire from their business when they’re ready.

Unfortunately, many businesses are worth little besides the value of their assets. This can put substantial burdens on those people who need to exit their businesses in an untimely manner. Health issues, burnout or family struggles can put unneeded pressures on owners who are already struggling to develop a plan to deal with uncertain futures.

Business valuation can be difficult, and the process can be long.

However, new blood can invigorate businesses to continue serving customers long after the original owners are happily retired.

Dave Fuller, MBA, is an award-winning business coach and a partner in the Pivotleader Inc. Thinking of buying or selling and have questions? Email dave@pivotleader.com. For interview requests, click here.


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