Buying or Selling a Business? How Much Is a Company Worth?
The current economic climate has changed the way that business owners think about their businesses. While we had worked with companies before the pandemic, helping them to prepare their businesses for transition, there seems to be a flurry of interest currently from business owners who are ready to exit their businesses.
There are a number of reasons why right now seems to be the time that people are thinking of selling or closing their businesses, however there seems to be several underlying factors for this situation.
In the current uncertainty, there is considerable stress of owning a business. While the economy seems poised to return to normal, the last couple 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 too has a factor in selling businesses, there are many baby boomers who are entering the last few years of their careers and 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, are those people who have had the best years ever. Their business has been booming because of the economic changes and there is no better time to sell your business than when your sales are at their peak.
So how much is a business worth? According to John Warrilow, 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 a business owner who wanted to sell his business. He was in a specialized sector and believed that he could get 3-5 million dollars from national companies. I had serious doubts about his pricing because the value he was attributing to the business reflected 40-70 times net earnings. After shopping his company around, the owner got back to us 10 months later and told me that he was offered between $300-500,000 for his business. However, he wasn’t prepared to sell as he figured he may as well keep the company that was making him $70,000 a year for little involvement.
There are a number of factors that affect company value, the most important being the profitability of the business and the value of the assets of a business. Businesses typically sell as an asset purchase – this happens when a buyer purchases those things that the business owns, including land, inventory, fixtures, and other assets. Share sales happen when business owners sell their shares in the business. Typically, business owners prefer to sell the shares in the company because there are some tax advantages that can be obtained through this process. A share sale would typically include all the assets and liabilities of a company. These tend to be more complex in nature and can take longer to complete.
Buyers usually prefer to buy assets rather than shares because there are some risks to buying a company where you might be unsure of potential debtors or litigation. In addition to profit, buyers are looking for the ability to grow the company, if there is little opportunity for growth the value of the business is limited. In addition, buyers will want a company that is not reliant on the owner, that has systems in place to make operations simple. In my book Profit Yourself Healthy, I devoted a whole chapter for people that are ready to move on, email me for a free digital copy of the book.
Valuing a business can be tricky, however, without realizing some value, most business owners fail to have enough for retirement. According to the Canadian Federation of Independent Business study as a result of the pandemic 42% of business owners have had to postpone retirement. The average small business has $170,000 in debt and some business owners are worried that they will never be able to recover from the additional debt load. Business owners need to be concerned about their retirement and have a plan that enables them to retire from their business when they are 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 businesses owners already struggling to come up with a plan to deal with uncertain futures. Business Valuation can be difficult and the process can be long, however new blood can re-invigorate businesses and continue to serve customers long after the original owners are happily retired.
Business Coach, Dave Fuller, MBA, sold his business in 2017, is the author of the book Profit Yourself Healthy and works to support business leaders with his team at Pivotleader Inc. Thinking of buying or selling and have questions? Email firstname.lastname@example.org