Dreams Reality Re-Sized

Did you know that 80% of businesses don’t sell, according to BizBuySell.com? The main reason that 80% of businesses don’t sell is because they are way over-priced. Most of the time, this is because the seller does not have a clue about what comparable businesses have sold for in the local area, and the agent who is listing the business chooses to accept what the seller feels is the right price. Sometimes it’s a case of the listing agent not having the training or experience to establish a fair-market value range. Usually it’s that the goal of the agent is to get the engagement at any cost, without explaining the reality of the situation. Telling the seller what he or she wants to hear creates a situation that wastes everyone’s time.

Sometimes a seller has heard the myth that business value is based on a percentage of sales. This is far from reality. The value of the business has nothing to do with sales (other than a trend in sales). The basis of value comes from the normalized earnings of the business, not gross sales. A business has to be able to repay the loan to buy the business, pay a reasonable salary to the buyer, and still have profit left over. Establishing normalized earnings involves an analysis that takes into account the net profit shown on the prior year’s federal tax return and the seller’s salary, then adding back any one-time “extraordinary” expenses, as well as expenses that a buyer would not incur. An experienced intermediary can help with this analysis.

Another other big reason businesses don’t sell is having poor accounting records, which includes buried personal expenses that the seller would like to add back to increase the owner benefit, or unrecorded cash sales. If sales are not part of the federal tax return, they do not exist to a buyer.

Other common issues are a concentration of more than 10% of sales to a single customer and failure to disclose issues early in the sales process that become a surprise in due diligence.

Consulting a professional intermediary a year or so before going to market to establish a plan can greatly increase the chances of selling a business, as well as increase the value of your business. Even if you don’t yet have a date in mind to sell your business, having an exit plan can help by having your house in order when unexpected things happen in life.

If you would like a confidential conversation about how to prepare your business to be sold, feel free to contact me at 888-893-6661 or bobd@dolansales.com. My LinkedIn profile is: http://www.linkedin.com/in/dolansales.