Whenever anyone wants to sell an asset, a house, a car, a business, they want as much money as possible. Many business owners also want what they need to retire on when thy sell their business or what they can boast to their friends that they got for selling the business but is this realistic? There are many businesses for sale which have been on the market for a long period of time – why? Is there a problem with the business or is the business owner asking too much money for the business?
When you sell a house, they can look at similar houses in the neighborhood and get and idea what their house is worth. In this market, people tend to price things more than their neighbors because they believe that there is a shortage of houses in some cities therefore people will pay a high price for the house. In business, no two businesses are identical. You can have two franchises for sale, same name, same products but one is considerably more profitable due to higher sales than the other. Are these businesses identical? In name only, but not in value. The one with a higher profit in theory should be worth more than the one with less profits.
Since all businesses are different, even those such as the above example which appear to be identical, you cannot look at the selling price alone to determine if it is reasonable. One business may sell for $200,000 another similar business may sell for $400,000. Just because one sold for $400,000, you cannot state that I have a similar franchise therefore my business is worth the same $400,000. What happens if your profits are zero and that franchise for sale has profits of $200,000 – do you think an investor will believe that they are worth the same?
The economy has also changed over the last few years very dramatically and the economy is still changing, HST is being implemented in Ontario and BC on July 1, foreign exchange rates are fluctuating significantly etc. These all have an impact on your business today. You may have been able to get a price of $x three years ago, but times have changes, the economy has changed and what you were worth three years ago has no bearing on the price that you are worth today.
Too many business owners believe that they are worth more than anyone else in a similar business and that is why their business remains for sale for a long period of time. Everyone forgets who they are competing with. If you have a business for sale in say a restaurant and are asking $1 million. The investor with that type of money may look at other industries as well, distribution, manufacturing etc. If a business in another sector has the same or greater profits than your business and the banks are more willing to finance a manufacturing business instead of a restaurant, a buyer of a business may buy the manufacturing company instead of the restaurant. The asking price for those other businesses may be higher but the equity required to buy a bigger business which is more profitable may be less the the amount of equity required to buy that for example restaurant. Sellers of business are not competing with just other businesses in their sector, they are competing with other businesses with the same asking price in all sectors. As a result, if you are over priced, the opportunities for investors may favor other businesses in other sectors and not your business.