What is my business worth?

Q: I want to sell my business and don’t know what to ask for. Short of paying for a full-blown appraisal, how do I get a ballpark number?

Many times it doesn’t matter what your business is worth on the books or how much it is appraised for. Ultimately, the real value of your business is dependent on what someone is willing to pay for it. If a new owner can’t afford to make payments to the bank from the money the business produces, no one will buy it. When you want to sell your business ask yourself, How can I price this business so a buyer can meet his needs? In most cases, those needs are to make:

  1. The salary he hopes to earn or plans to pay an on-site manager
  2. Payments to the bank to cover the cost of what needs to be borrowed
  3. A respectable return on investment on the 20-30 percent cash the new owner puts into the deal.

With a healthy economy, most buyers realize they could earn at least 10 percent a year just by putting their savings in a mutual-fund portfolio. Most hope to better that performance, with an investment return that covers the additional risk associated with buying a business. That may create problems for you, the current business owner, because you could be drawing below market salary or you don’t pay any financing costs at all because you grew the company from scratch.

Although most buyers look for a company with good growth prospects, they will price deals based upon prior financial performance and pay special attention to the previous year’s cash flow. The banks look carefully at this and also like to see a lot of physical assets for collateral and little or no blue sky, or intangible assets, in the selling price.

When preparing to sell your business:

  1. Show as much profit in your business as possible for three to five years. I know everyone hates to pay taxes, but it is hard for a buyer to get a deal financed if there’s no profit showing on the books.
  2. Be prepared to let potential buyers see the last three to five years of tax returns, balance sheets, machinery and equipment list and an inventory list.
  3. Consider owner financing. Especially if your price includes money for blue sky assets, you may need to be willing to be paid over a number of years. This may also help on capital gains taxes. Check with your accountant and lawyer before you structure the deal to make it beneficial for both parties.
  4. Focus your sales pitch on people that know your business. Key suppliers, large customers and employees might be your best prospects to buy your business.

Although the Small Business & Technology Development Centers (SBTDC) are not in the appraisal business, we can help determine if a potential buyer can break even or make a profit based on your selling price. For further assistance, contact a business development specialist at a SBTDC near you.