This article are provided for information purposes only, and are not intended as legal advice.


Businesses for sale – how do you value them in a declining economy?

March 31st, 2009

Traditionally, looking at the past financial statements is a reasonable indicator of what the company will do in the future.  This is not applicable for companies whose revenue is based on contracts and one time sales. There are many companies who are not impacted by the current market conditions.  However there are many that are.  For those who are affected, looking at the past is no indication of future sales.  For example, sales were good in the automotive sector one year ago, but now sales are down considerably.  You cannot predict sales today by looking at sales a year ago.  That makes it very difficult to estimate normalized income on a go forward basis.

 

Based on a very small survey which I did, many business brokers now recommend that part of the sales price consist of an earn out.  Since the sales are unpredictable and you cannot determine if your customers are being affected by the every changing economy, a formula is determined.  If sales can attain a certain level, the price is paid in full.  Typically, a down payment is  paid and the rest is paid out over a three year period.   Some companies hope that they can buy a company with no money down and have the vendor take full risk if they falter.  I would not recommend that unless there is no equity in the business to start with.  If the purchaser does not have any money at risk, then they do not have any negative impact if the business fails.

 

Businesses for sale which are priced reasonably are still selling.  There are lots of companies who are looking to buy a business.  If your business have been on the market for a long period of time, it is one of two things – over priced and you need to reduce your price or financing for your industry is very difficult and you will need to assist the vendor with some sort of vendor take back/earn out financing.  Which is the right solution?  Contact a business broker for assistance in pricing your business.


Filed under: Businessses for sale — Gary Landa @ 7:53 am


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