Quick Consultant: Start Early if Planning to Sell Your Business

Every week I hear from printers who have urgent questions about valuing their business. The scenarios differ, but the sense of urgency is a constant. One partner approaches the other partner and demands that he be bought out. A divorce looms on the horizon and both spouses need a quick valuation. A large, local competitor approaches a smaller company with a “no cash” deal, but a fair salary and 10% stock in the buyer’s firm. The common theme among these situations is that they involve a sense of urgency.

If you really must sell now, there just isn’t a lot you can do to increase the value of your business. You can dress it up a bit, add a fresh coat of paint, and get rid of junk that has piled up for the past 20 years. But in the end, the value of your business is what it is.

How Much Is Your Business Worth?

Let’s assume your business is about average size for this industry, meaning it is doing about $1 million in annual sales. How much do you think it might sell for? I just grabbed my handy copy of the NAQP/NAPL Benchmarking Study and ran some quick numbers.

The average company in this industry, with annual sales of approximately $1 million, could be priced at $356,000, and probably would sell in the $310,000-325,000 range after negotiations. The seller, if he is lucky, will also retain an additional $100,000, which will represent the cash in the bank, the accounts receivable, and responsibility for accounts payable. This company has average profits, average net assets, and average SPE.

Now, let’s look at a similar size company that falls in the top quartile in terms of profitability. How much can it be worth? According to the Benchmarking Study, the result was a valuation of $780,000. That’s more than twice the value of one of its peers.

It is important to note at the outset that there is a distinct difference between the value of a firm and its suggested selling price. The reason for this is that, in almost all sales, the typical seller automatically takes out some of the value of the business prior to transferring it. This typically involves keeping the cash, savings accounts, and assuming the net balance between the current AR and AP accounts. While cash and savings retained by the business clearly contribute to the value of the business, they are rarely sold, because it makes no sense to sell cash.

Planning to Sell in 2011-2012?

The more time you have before putting your business on the market, the greater the opportunity to add value to your business. Remember, however, that “short sales” and foreclosures abound. If you don’t have to sell, don’t. If you must sell, at least take the time to boost the value of your firm by considering some of the following issues.

Realistic Expectations: You can kill a potential sale or prevent a “for sale” from even getting off the ground if the business is not priced properly. Not only do you have to be realistic, but you also have to recognize your “reality” may be far different than that of a potential buyer. First, forget all those rules of thumb you have heard bandied about in years past. Most didn’t work then, and they certainly don’t work now.

Second, accept the fact that your business, first and foremost, must be profitable in order to be attractive to a buyer. It must be producing profits above and beyond what would be considered a fair market salary for the owner. In other words, a business must produce enough excess earnings to buy itself.

Third, remember that the value of your business is primarily based upon its current performance. (For more details on business valuations, visit www.printshopsforsale.net.)

Fourth, if the business has potential, it should already be demonstrating that potential in terms of profits. Telling a prospective buyer that someone with selling expertise and knowledge of social networking could really take this business to the next level is not a very logical method for justifying a higher selling price.