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How to Sell a Business: Prepare for the Sale
Price Your Business
Valuing a business that is losing money
So you have a restaurant that you invested $200,000 into. It surely has to be worth what you put into it right? Sorry, but it is unlikely.
Here is an interesting fact: Buyers will usually consider buying a variety of different types of businesses. So the price of your business must be competitive with the buyer’s reasonable “alternatives.”
Note: This formula is not true if the buyer is specifically looking to buy only your type of business. For example, the buyer only wants to buy a bakery. But don’t fool yourself – less than 5% of buyers only want one type of business. You shouldn’t be selling your business based on exceptions anyway.
The price of your business must be competitive with reasonable alternatives. Imagine you are a buyer – which business would you buy below?
- Business A – Asking $200,000 – restaurant that is breaking even
- Business B – Asking $200,000 – restaurant making an annual profit of $100,000
Which business would you buy? 95-99% of buyers will buy Business B. Remember that most businesses are priced at around two times the cash flow, so realize that if you are asking $100,000 for your business, then most businesses that sell at that asking price will be producing $50,000 per year of cash flow (or profit). The number one thing buyers look for in a business is profit.
But I see businesses for sale that are asking $250,000 or $300,000 and yet are not profitable? Yes, they are “for sale,” but not “sold”. Why do you think you don’t see that many businesses that are priced right that are still for sale? It is because they are sold – because they are priced right. Probably 80-90% of businesses are overpriced – don’t let this fool you.