“If I sell there will be trouble, an’ if I close it will be double.”
When a business owner is ready to step away from their business, there are two directions to consider when creating the exit strategy:
- Sell to someone to “Keep the Business Open” or
- “Close the Business” and break it apart to sell the hard assets.
Let’s look at some financial factors that go into each option.
To sell and “Keep a Business Open”, a business will be priced as a whole package, based on the estimated profitability for a new owner.
This estimate is taken from past year financials (typically 3 years) where the current owner’s take-home monies are totaled. Certain discretionary expenses used by the current owner can be added back, but expenses used for business operations are maintained in this calculation. After reviewing the business profits and expenses, adjustments are made, and an amount is found called the Seller’s Discretionary Earnings (SDE).
The SDE is then evaluated along with the business type, location, trends, as well as, owner duties, to determine whether the business is marketable for sale. By far, the most important evaluation factor is always the SDE, after all, selling an operating business is essentially selling an all-in-one machine for making money. All the tools, equipment, vehicles, techniques, processes, customer lists, relationships, branding, contracts, and employees, are included in the business price since they are all part of this all-in-one money machine.
However much SDE is projected to come out of the money machine – $50k? $100k? $200k? $500k? $1M? – is what potential buyers will always look at first. Which money machine would you want to buy? Which would you pay the most for?
For a small business, selling to “Keep the Business Open” includes a sales price that considers the SDE versus a new owner’s cost to make a good living while also making payments on a business loan. Most small business buyers use some type of business lending and will have to prove to their lender that the business’s financials have room for a monthly loan payment.
Why do some owners choose to “Close the Business” instead of selling to a new owner?
Lots of factors can contribute to a business closing instead of selling, but by far the number one is the business just isn’t making enough profit. Even if a business is making a fairly good profit, there are times when the assets of the business are worth more broken out and sold separately than kept together.
If an owner has expensive, underutilized machinery, equipment, and/or inventory, they will possibly have a liquidated value that exceeds the value of the business priced as a whole. In this case, even if an owner is willing to take a lower price to sell everything together to keep it open for employees and customers, they run the risk of a buyer purchasing the business at the lower price only to turn around, close the business, and sell the hard assets for the higher liquidation value.
Having a business broker or business consultant review your financials will allow you to compare possible earnings from selling versus liquidating. Sometimes one is clearly higher, but there are times when the two values are so close the decision becomes the business owner’s personal choice.
After years of depending on loyal customers and employees, many owners would rather keep the business open and sell it as a whole, even if they have to help a buyer by carrying a small loan or include equipment they might have sold separately for a higher price.
If you’re interested in a free confidential review of your business, message me directly, email firstname.lastname@example.org, or call 256-503-2806.