Why Won’t Your Business Sell?
Less than 20% of businesses for sale are actually sold. I help business owners prepare to exit and I’m surprised by how many owners try to price their businesses, especially those that are struggling, by how much they owe, or how much they have put into the business. Selling a business is a lot like selling a home. There are “comparables” that must be considered in addition to the overall market in a particular area. Understanding the value of your business is a critical step in any exit strategy. If the business is overpriced, it simply will not sell. Overpricing in hopes that a buyer will make an offer that is reasonable is a losing strategy, just like in the housing market. Buyers simply won’t do that.
Overpricing a business signals that the current owners lack business savvy and might be difficult during negotiations. With the plethora of businesses on the market, owners wishing to move away from their businesses should carefully price their businesses. Owners who use attorneys and business brokers (both are necessary) are far more likely to see success in selling their businesses than those who do not.
Several methods can be used to determine a business’s value, each offering a different perspective on what your business is worth.
EBITDA Multiples: One of the most common methods is using a multiple of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). This approach involves multiplying your business’s EBITDA by a specific factor, which is typically determined by industry standards and market conditions. The EBITDA for childcare centers right now is about 4x, while the EBITDA for logistics companies is about 3x (even less for Amazon DSPs, which are about 1.5x).
Discounted Cash Flow (DCF): This method estimates the value of your business based on its future cash flows, discounted back to their present value. DCF analysis is often used for businesses with predictable and stable cash flows.
Comparable Company Analysis: This approach involves comparing your business to similar companies that have recently been sold or are publicly traded. By examining the valuation multiples of these comparable companies, you can estimate the value of your own business.
Venture Capital (VC) Method: This method is mostly used to value pre-revenue start-ups with potential for acquisition. It estimates your startup's value based on its expected future exit value.
Accurately valuing your business requires a thorough understanding of its financials, industry trends, and market conditions. Engaging a professional appraiser, lawyer, or investment banker can help ensure you get a fair and accurate valuation.