What I've Learned About Business Sales Part 1

What have I learned about business sales? 

Number 1, Great books and records are a must

A leading reason why only 20% of businesses sell is that most of them have poor books and records. There is no organization or trail of all of the sales and expenses that are in the business. A business that is highly organized is worth its weight in gold. Buyers are risk averse and great books and records mitigate the risk.

Number 2, Record and Keep Records of All Cash

Cash that is not recorded or shown on your statements is troubling to buyers. A buyer will not want to assume the risk and just take your word. As such, the solution that a buyer will offer is an earnout or deferred payment at a certain date based upon how the business performs post-closing.

Number 3, A Good Lease is Essential

Buyers these days are very thorough when buying a business.  With so much information online, it’s possible to find out market rents and make sure you are paying average or below market rents. With tons of empty storefronts, buyers have negotiating power.  A bad lease can be a deal killer. When you are selling your business you are loosely selling the opportunity to control a piece of real estate and that has value.

Number 4, Do Not Price Higher Than Comparables of Other Businesses

Each business has a cash flow multiple that its trades. Any goodwill or reputation that a business has is shown will be proven in its sales number. Business sales is difficult and there are stats that show that only one in five businesses listed to sell actually sells so it’s vital to be aware of the correct cash flow multiple for your industry.

Number 5, Renovations Are Not A 1 for 1 trade

I have seen business owners invest a few hundred thousand dollars in the physical location of the business and then the revenues don’t show that the owner projected. For example, I see many owners say I put 300k into the business and want a price of 300k. The market determines the value of a business and not the money spent on renovations. Money spent on renovating the physical location is never a one for one trade when selling your business. Many tenants invest a substantial amount of money in tenant improvements without knowing how they will recapture their investment.