If you’ve spent years — maybe even a lifetime — building a small business and are starting to think about retiring or cashing out, now may be a good time to sell.
The median asking price of businesses for sale grew 12.5 percent in 2015 to $225,000, up from $200,000 in 2014, according to BizBuySell.com, an online marketplace with more than 40,000 business listings for sale. The entities are selling on average for about two to three times their annual cash flow and at 90 percent of the asking price, according to the website.
“A lot of higher-quality businesses are hitting the market as sellers are seeing the success of others in the marketplace,” said Bob House, general manager of BizBuySell.com and BizQuest.com, which together have about 76,000 businesses listed for sale.
Ideally, owners should begin getting their businesses ready to sell business Southern California at least a couple of years before they hope to close a deal, House said, to slowly wean themselves from the day-to-day responsibilities and getting it in tip-top financial shape.
Get your financials organized
A diligent buyer is going to want up to five years’ worth of profit and loss statements, bank statements, tax returns, leases, supplier and vendor contracts, and customer data, said Barbara Findlay Schenck, a business strategist and author of “Selling Your Business For Dummies.”
Make sure the paperwork looks clean, organized and clear so that it is representative of a well-managed company and so that you do not inadvertently mislead the buyer. “You can’t sell a business with records in a shoebox,” she said.
“Sellers forget that the value of their firm is the value of the firm tosomeone else,” Berkeley said. Businesses are often priced as a multiple of either their revenue or cash flow, which varies by industry and size.
The average small business is priced about two times annual cash flow, but as cash flow increases, so does the multiple. Businesses with a cash flow under $100,000 received a sale price of about 1.97 times cash flow. Those showing between $300,000 and $500,000 exhibit a multiple of 2.81, according to BizBuySell.
A premium can be charged for a firm with either a pipeline of business booked in the immediate future, a 25 percent annual sales growth trend, or proven repeat business, Berkeley said.
A savvy buyer is not going to care about cash flow only.
Discretionary income-based valuation
Another simple but effective way of valuing small businesses involves determining the current owner’s discretionary income.
This offers valuable insight into what a buyer can expect to earn on a monthly or yearly basis (assuming no substantial changes are made to the company’s current situation), what their ROI is likely to be and how long it will take to realize that return.
To determine discretionary income, take the amount the owner has declared on their income tax, add in any discretionary expenses such as automobile expenses, travel expenses, salaries, interest costs for business loans and depreciation.
Then, add those discretionary expenses back into the owner’s declared income and multiply the result by 1.5 to 2.5 to come up with the final value for the business.
The multiplier provides a significant range in which to negotiate the final price based on intangible items that the equation does not factor in, as described in previous methods.
This valuation method’s greatest limitation is its assumption that the business will continue to operate unchanged after changing ownership.
This assumption depends largely on how the company is currently set up and run.
If the current owner plays in integral role in daily operations (rather than a more distant oversight role), a prospective buyer will need to very careful to determine if he or she can fill that same role in the same way. If not, the discretionary income method of valuation is likely to be misleading.
In Summary you will need to Provide:
3 years of P&L (Profit and Loss) financial statements including this Y-T-D
3 years of tax returns (business or business portion of personal tax returns)
Any lease agreements if applicable
Balance sheet
3 years of bank statements
Any additional Bank Records (Credit card statements, etc.)
Asset List – Inventory, DBA, equipment, etc. that is transferable with the business
Business/Owner Bio – How long has the business been in operation? How long have you owned the company? (Etc)
BizBuySell.com, a highly renowned marketplace with more than 40,000 business listings for sale, states that there is tremendous growth in the median asking price of businesses for sale. According to them, the meridian price was $200,000 in 2014 and went up by 12.5 percent in 2015 with a figure of $225,000. This website also adds that on an average level, the entities are selling approximately 90% of the asking price and 2 to 3 times their yearly cash flow.
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