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How To Sell Your Business
Questions
& Answers
How
Do I Value My Retail Business ?
The
Question
How do
I value the selling price of a window treatment business We currently
run a window treatment retail store in central Illinois and have
an employee who would like to purchase it. I would probably value
it off a multiple of sales plus inventory plus equipment. What
should the multiple of sales in our type of business be?
The
Answer
Different
information sources will report different numbers but most valuations
for a retail business have been between 0.75 to1.5 times net sales
+inventory + equipment. But retail businesses don’t necessarily
have to be valued based on sales and I recommend that you don‘t.
Here‘s
why: sales tell you nothing about the profit that the business
generates for it’s owner. One retail store could have a $1,000,000
in sales and be losing money while another similar retail store
could have $500,000 in sales and be profitable. Which would you
pay more for?
If you
have read any of the information on this site I know I'm going
to sound like a broken record, but:
To value
your business and come up with an asking price that can be justified
to the buyer I suggest you use the "Owner's Benefit" as the basis
for any valuation.
The formula
for determining the owner's benefit is:
Annual
Pretax Profit + Owner's Salary + Owner's Perks/Benefits + Interest
+ Depreciation.
This number
will give the buyer an idea of how much money the business actually
has been generating for you as the owner. And since their interest
and tax payments will be different than yours, you want to add
tax and interest payments back into the total owner's benefit
number. From there the buyer can make their own estimates of what
their interest and tax payments will be.
The Owner's
Benefit equals the amount of money + benefits the business generates
for the owner.
Most
businesses will sell for multiple of the owner’s benefit somewhere
between 2-5. The multiple will vary depending on a whole
host of factors such as the level of competition in the area,
the attractiveness of the lease and whether profits have been
trending up or down in recent years.
It will
be great if you can sell the business to an employee as this will
make the entire selling process shorter and easier. But be
careful: a lot of owners have sold their business to an employee
because of friendship or loyalty even though the buyer was not
financially qualified.
Whether
you offer seller financing or not, most buyers will have to
borrow money from somewhere to buy the business. So when the
buyer looks at your business and your asking price he wants to
know:
"At
this asking price, can I service the debt I will need to take
on, plus pay myself a reasonable salary, plus have some money
leftover to put back into growing the business?"
Whatever
price and terms you and the buyer agree to, the buyer will need
to be able to answer "yes" to all of these questions
or the deal won't work. What is a "reasonable salary" for one
person may be completely inadequate for another who has a different
lifestyle and financial obligations. So the issue is not just:
"Is the business priced correctly?", but "Is this price workable
for this particular buyer with their needs and financial situation?"
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