For anyone that has never bought a business, it seems a lot of money to pay $300,000 to $400,000 for a business that had a Sellers Discretionary Earnings (SDE) of $100,000 to $150,000 per annum.
Probably most of it is “goodwill” and may not include as many assets as you’d have thought. The main reason for that is that (in most cases) we value a business on it’s performance.
“Selling a business must make financial sense for a Vendor”
When you buy a business, you are paying for the cashflow or the profits that a seller has build up over some time. When the business is still young, and it hasn’t got a proven record over a sustainable time, it may reflect in the asking prize.
I sold a business once that had $2000 worth of shelving, a cheap lease off the main road and a SDE of $350,000 to $400,000. It sold for $800,000 +stock.
The “goodwill” was in the performance, but also the Intellectual Property (IP), the traffic to the website, the database and its personal relationships, the supply contracts and rights to distribute the products from well-known international suppliers.
The decision to sell this business was that one of the working owners needed to retire and the other was willing to stay on to help the new owner. We exceeded the expectation of the owner in both price we negotiated and the time frame (within 2 months from listing we received the first and final offer)
At the end of the day, such decision to sell the business must make financial sense. The selling owner often must replace the income (if it’s not a retirement sale) and a low offer may not be worth the risk of not being able to move on to the next project or next stage in life.
“Why would you even consider a lower offer?”
Analogy: It’s a bit like if you had the opportunity to sell your job; if you earned $40,000 per annum and you knew that in your next job you could make $100,000, you may consider a lower offer for the $40,000 job. However, if you earn $120,000 and you don’t know what you do next you may want to only consider an offer of $250,000 because of the risk you take. After all, you are pretty happy with a guaranteed income of $120,000, so why would you even consider a lower offer?!
I did sell a business where the assets represented 90% of the asking price. The asking price was $125,000; exactly last years’ SDE. The sale price included tractors, tools, stock and to sweeten the deal the use of the yard for 12 months for nothing. The business had been on the market for over 12 months (after they had tried to sell it privately without luck). It was worth to sell for less than the value in order to move on to the next project, involving millions of dollars, rather than thousands.
One day a couple returning for oversees needed to buy an income and the income fitted their lifestyle. The business is thriving, and they have never been busier. This year they will earn much more than the initial $125,000.
One thing is true in most cases; The buyer will always pay too much, and the seller will never get paid enough for the business.
When you buy a business, you must think about what the seller is giving up and how you can make improvements to suit your lifestyle and life goals. Rather than starting from scratch, with no guarantee of the concept taking off, there is much less risk in buying an already existing business with a proven track record.
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