As Business Brokers, one of the biggest factors that we look at when we are considering taking on a new listing is the salability of a business. Given all of the information we have at the time, coupled with our experience, do we think that this particular business is likely to sell? We’ve been surprised before by unlikely horses winning the race, but there are a few elements that we generally look for when judging the salability of a business. We think it’s helpful for business owners to be aware of these things too, so that they can prepare their businesses for sale by remedying some of these issues, so that their business is as saleable as it can possibly be.
Is it profitable or have valuable assets to sell?
This one seems like obvious criteria, but it had to be noted, nonetheless. A business needs to be making a profit or if it’s not making a profit, they would need to have equipment/tangible assets to sell. For example, a restaurant might be showing a loss on the books, and there is no real profit to show, but they have an amazing kitchen with top of the line equipment that they purchased when they opened just a few years ago. Even though the business is in the red, we can still sell that business, based on the market value of the equipment. The profitability of the business needs to be at a level of owner benefit that a buyer would desire as well, and that’s why, the majority of the time, we base business valuations on a multiple of the owner benefit. How much the business is making ties in directly to the value and eventual purchase price.
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Is the expectation of purchase price realistic?
The most common reason that a business doesn’t sell is that the asking price is just too high, and buyers can’t see value in it. So, one of the most important factors in salability is the purchase price. When we do a business valuation, we spend hours on our recast of a business’s financials, we comb through all of the sold comparable businesses to find the right comparisons, and we come up with an estimate of value that we believe will be the most probable selling price.
The average business owner doesn’t realize how businesses are valued, and many come to us with a number already in mind. One thing that we can always promise is that we will be 100% honest with our customers, and that starts with having to tell a seller that their business unfortunately isn’t worth what they thought it was. Sellers who understand how we got to our opinion of asking price, who value us being their trusted expert when it comes to what the business should sell for, and who ultimately take our advice on price have a much higher chance of selling.
If a seller resists marketing the business at a realistic asking price, then it would definitely make it a difficult listing to take. Business brokers put hours and hours of time in, spend thousands of dollars in advertising and marketing, and we don’t get paid until the business actually sells. So, we need to carefully back horses that we know are going to cross the finish line.
Are you the business?
With some businesses, it’s tough to say if they are sellable or not, because it is a “one-man band” as we call it. Businesses that don’t have any employees, and the owner is basically doing all of the work can be tricky to sell. It limits the pool of buyers to someone who can step right into the business and continue what the owner has been doing. In some cases, this is a learned skill or required license, such as auto repair, medical or law practice, construction, or an accounting firm. Some industries are easier to sell a “one-man band” in, because larger companies can buy them as an acquisition to add to their current company or a buyer could be relocating to a new area and they need to find a new crop of clients quickly. There can be some downsides here, because the seller had the relationship with the client, and the client might not want to continue with the new owner, and that is a risk that the buyer must take in these cases. In most situations, the seller is willing to ensure a smooth transition between themselves and the new owner, so hopefully that will help retain the majority of the clients.
Are there solid financials and provable records?
One of the most important factors of salability is the health of the business’s financials and the accuracy of the record keeping. Is the seller able to provide tax returns as proof of income and expenses or is it more of an “owner to prove” situation where the business takes in a lot of unreported cash? Owner to prove is a tough one, because the owner has to basically “prove” to the buyer that they take in the amount of cash that they say they do. This can be a challenge in some cases, if the owner doesn’t deposit the cash and has no bank statements, or they don’t keep records of the cash they take home. This would be a tough business for us as brokers to take on, because the chances of a buyer going the distance would be slim, if the seller can’t prove the income. Now, in some industries, such as restaurants, everyone knows that it’s cash-heavy, and industry buyers will understand that, so hopefully the owners are keeping some records that they can share with the buyer. At the end of the day, businesses with solid financials are more likely to sell, and they widen the pool of buyers, especially with visa buyers, because the US Immigrations & Customs will only approve visas with businesses that have squeaky clean financial records. Running a business with clean books and good records is never a bad idea, and it’s the ideal way to operate a business anyway.
Is the business in an industry that’s attractive to buyers?
This is probably the trickiest element to salability, in terms of judging whether or not the business will be in an industry that is attractive to buyers. The truth is, if the business is profitable, the price is right, the records and the financials are good, and a buyer can easily walk in and run the business, we would most likely take the listing. If it’s in a niche market or in an uncommon industry, obviously the pool of potential buyers might be smaller, but it doesn’t mean that it won’t sell. We can do our best to get all of the other elements right, and then get the business out there marketed to the correct audience, then it’s just a matter of finding the right buyer.