After you have made the hard decision and decided to sell your business, the next step is to understand what a fair market price is for your business. This is the time to be realistic about what a buyer will pay for your business. To determine a realistic market price you must take all of the following into consideration:
• Assets of the business and their condition
• Profitability of the business going forward
• Risk to generating the profit
• Potential for the business going forward
• Owner’s involvement • Barriers to entry
• Current market conditions
All of the above impact the market price you place on your business. Each of the above can be discussed in greater detail. To get started, lets discuss assets of the business and their condition.
If you have a business which has significant assets like equipment for manufacturing, fit-out of supermarket, cafe or restaurant or a fleet of vehicles, these assets will form part of your market price for your business- without them your business cannot operate.
But you need to be realistic about the asset sale prices. The depreciated value in your financials may help with the value, but not always. You need to understand your assets are used and have a finite life. If I am a business buyer, I am looking at your repairs cost and if they are becoming regular and significant, the assets may have little value. Lets consider two examples – a manufacturing business and a cafe.
Manufacturing Business A strong manufacturing business wants to sell and if you tried to replace the current equipment with new equipment, it would cost you over $1m. However the current business equipment is over 10 years old but still in really good condition. Has been fully depreciated. So what is it worth?
On the open market sold, without the business, it has little value due to its age. However with the buyers looking at this business, they will be considering when the equipment needs to be replaced. If this equipment has a 20 year life span than it still retains some value, but if it needs to be replaced in less than 5 years, the buyer knows that in the next few years they will need to outlay $1m to purchase new equipment, dispose of the old equipment and allow for downtime for this to occur.
Cafe Brand new fit out, 2 years old and situated in a location with high traffic and captive audience. If the business is strong the fit out will not be worth its new price but it may not be worth half its price either. You will notice the business needs to be strong to justify the fit out cost. If the business is not successful, it does not matter if you spent $1m on the fit out, it has little value unless a successful business can be established.
For further information on business sales and equipment, further