Yesterday I spoke of an outline of what needed to be done prior to listing your business for sale. Today, I will elaborate on these topics:
When you sell your business, you need to prepare an executive summary which is usually a 2 to 3 page overview of your business. The purpose of the executive summary is to entice an investor to be interested in your business for sale and want to get more information. You have very limited time to attract an investors attention. If you provide your listings on The Business Place website, your listing must entice the reader to want to know more about your business. If your listing provides little information, it is hard to get someone excited to contact you. The first thing you need to do is to be able to write an exciting intro to your firm. If you are not a good writer, hirer someone to write it for you. If you can attract an investor to contact you, the executive summary will be important to provide the investor with more information but not too much information. You never give away trade secrets or customer lists to a potential investor who also could be a competitor. The listing on the website is to get the investor interested in getting more information about your business. If he does not want more information, then you have just lost a potential buyer. Sometimes, an investor will come across a listing and it may be a perfect match however the wording on the website listing is so poor that the investor does not want to ask or pursue this opportunity further.
Too many investors state this is a good buy. Sellers forget there is an opportunity cost. I was called by an seller of a business last week and he tried to sell the business by himself. The business was not profitable yet he believed that it was worth $300,000 because you could sell the equipment for $200,000. Vendors believe that equipment is worth more than the market will pay. If the equipment was purchased a year ago for $300,000, it depreciates quickly and is not worth the same a year later. It may be worth 50% or more less than the original price.
Sellers of businesses also do not calculate normalized earnings. What is the profit that a third party will generate with the same sales if they take over. That means that family members who are on the payroll are excluded from profits, personal expenses such as travel is excluded. Remember, if you say that it is an expense that will not be required by the new owner, you have to prove the expense is not required. Some people need to advertise their products but when a new owner is looking at the business, they say that is discretionary, you don’t need to pay the $30,000 of extra advertising expense, pay me a multiple of 3 times my earnings so now you owe me another $90,000 because you really do not need to spend money on advertising. Is this a real ongoing expense, that is what the potential buyer needs to determine. Add backs to net income to determine normalize earnings definitely affect the purchase price and that is why sellers argue that expenses are non reoccurring and are discretionary.