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If the business is not priced correctly, it will most likely continue to sit on the market. This frustrates you and turns away possible buyers. Most businesses are sold at a price based on current performance. All businesses have future potential that may be much greater than the current numbers, but only in rare cases is that a significant factor in the sale price. Buyers often tell us that one of their frustrations is trying to find a business that is correctly valued that will qualify for bank financing.

Think like a buyer and the bank. The buyer has to pay back the loan and provide for his / her family from the cash flow of the business.

The following is a simple exercise; sometimes called the “Sanity Check”. Key numbers used are:

• Sale Price: Value of the business + Operating Capital (could be an additional bank note or cash/accounts receivable from the business included in the sale)
• Down Payment: Assume the buyer puts down 20% of the sale price
• Bank Loan: Assume the remainder financed over 10 years using an SBA loan (7.5%- 8.0% interest, could be more or less depending on the lender and if fixed or variable).

Next, start with the annual cash flow of the business and follow these steps to perform the “Sanity Check”:

• Subtract the annual loan payments. The bank will most likely require a 25% cushion or “coverage ratio” above the annual principal and interest.
• Subtract average annual capital expenditures needed (new vehicles, computers, etc.)
• Subtract a reasonable owner salary
• = Cash Remaining. There must be enough cash to generate a return on the down payment (think 20%-40%).

As Business Brokers, we have access to many different databases of businesses that have been sold all over the country. This data shows actual sale price by industry, by annual sales, by cash flow etc. We use this data in our valuation process. However, if the sale price does not pass the “Sanity Check” above, the business will probably not sell, and the buyer cannot get a loan approved.

As you can see, if the business is priced too high, the numbers just don’t work for the buyer or the bank. That’s why it is so important that a seller understands the value of their business based on the current financial results.

If the sale price does not work for you as the seller, then you should possibly consider postponing the sale while executing a plan to grow the sales and profits over a few years to the level that will generate the sale price needed. We can Help.

If your plan is to sell your business in the next 3 years or less, we should talk now. We can help you attract more buyers and maximize your selling price.     

Call us for a no cost conversation at 678-988-1495. We look forward to hearing about your business.