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

Is now a good time to sell a business?

October 7th, 2009

The business climate has made the last twelve months difficult but you have survived but do not know what the future will hold.  Do you sell you business today or do you wait?  What are you waiting for, better times, several years of good earnings? Remember, many people like to look at three years financial statements.  If this year was a poor year, and you hope the next three years will improve, that means that you will not be able to sell the business until sometime in the year 2014 when your 2013 financial statements are completed.

Will the economy be kind on your business in the next few years?  How much better will the business be than today.  Remember, investors look at three years of earnings therefore if you made all your improvements in year three, you really need to wait an additional two more years to get a better price for your business.

Let’s look at a quick example.  Your business is making say $100,000 normalize earnings and a buyer may be willing to pay you three times your normalized earnings or $300,000.  If you believe your business will improve, are we talking 10%, 20% more profits.  If profits go up by 20%, based on the same formula, your goodwill is worth $360,000.  If your profits are $100,000 year one, $125,000 year two and $200,000 year three, someone may question if the last year’s profits are sustainable and my average your three years earnings.  That would make it equal to $141,666 on average therefore the price would be $424,998.  If you could sustain year three’s profits, and if you kept the business for another 2 years, then your three year average would be $200,000 and your price would be $600,000.  That is a 41% increase in selling price.

If you getting old or have health problems, are you able to wait, probably not.  If you believe that the business may suffer and go downhill over the next three years, you are better to sell today then wait for another three years.  If you believe that your business will improve and you have good health, it will definitely be better for you to wait until the economy improves significantly.  You will end up with more money to enjoy your retirement if you can wait but not everyone is in that financial position to wait.  If you are losing money or if the banks are reducing the line of credits and wanting you to invest more money in your business, can you afford to do that?  Do you have surplus funds to do that or are you forced to sell your business because your bank manager will no longer extend the amount of money that he once did for you to operate your business.

In summary, there may be many reasons that you may be required to sell or need to sell your business.  You may not have the choice to wait.  Waiting is better if you believe that your business will improve, if you believe that the business will remain static, then you sell when you are ready to retire.

Filed under: Sell a business — Gary Landa @ 6:48 pm

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