Selling your business can be a life changing event. There is a vast amount of work that goes into having a business for sale, work that must be done. Preparation, as in many projects we take on in life, is a key part of a successful selling of one’s business. Consider these business ideas when planning to sell your business.
To begin with, it must be understood that having a small business for sale involves evaluating a few primary areas of your enterprise. These areas are the positive and negative aspects which will affect the value. Of course there are endless variations on different businesses, and even businesses within the same category and type will have variations. But for the purposes of preparation, here are the main ones to consider.
We begin with the assets. Assets can be broken down into categories such as cash, investments, equipment, accounts receivable, goodwill, and real estate. Assets are the valuable possessions of the business which can be used to produce revenue and earn profits. A business must have some sorts of assets to be a business, and it must be able to produce revenue. So our first consideration is: does the business make money?
Clearly, for a business to have value it must be able to make money. How could it be worth much otherwise? Making money is the reason businesses exist; they are not there just because they enrich people’s lives or keep people occupied; that’s what non-profits and government bureaucracies are for. Businesses exist to make money, bottom line.
Unfortunately, there are many small businesses for sale that do not make money, i.e. (they do not “cash flow”) but are being marketed for sale, at high prices. If you ask the sellers how they can justify the price, you will get a variety of answers ranging from “Because we have put so much into the business” to “Because it is going to make a lot of money in the future”.
The problem here can be understood best by doing a quick mental switch and putting yourself in the shoes of the buyer. Now you are buying the business for sale and you are getting ready to write a huge check to take over the operation and all its hassles and challenges and surprises. And you ask yourself this very rudimentary, basic question: Am I willing to pay for something with the mere hope that I can make it pay me back, even though it’s NOT doing it now?
It doesn’t take an IQ above room temperature to realize you cannot simply hope to make money if you are going to spend money to get that opportunity. In other words, you cannot, you should not, pay for risk. The ancient equation of risk and return comes into play here. Knowingly taking on risk should come at really cheap prices, or no price at all. But to buy a business, a profitable business that has a current track record of making money, should come at a price, even a high price if it makes enough money.