4 Myths About Selling a Business in Tucson or Southern Arizona
Whether you are buying a business in Tucson or Southern Arizona, or selling a business in Tucson or Southern Arizona, or considering making a Tucson Business Investment, remember one thing: the market rules.
Most business owners considering selling a business in Tucson or Southern Arizona, will at some point ask themselves “I wonder what I could get if I sold my business?” The asking price is what a seller wants, and the selling price is what a seller gets.
Here are 4 common myths about selling a business in Tucson or Southern Arizona that Allen & Young would like to help you avoid:
Myth One: Businesses in my industry all sell for “X” times annual revenue.
While many people fall back on these kinds of “rules of thumb,” they turn out to be unhelpful because as regards the sale of your business, averages don’t apply. Just consider: If you had 5 businesses sell, and 4 sold for $150,000 and the 5th sold for $500,00, the average would be $220,000. A buyer is not going to pay an average price for your business; they will pay what your business is worth as determined by the market.
Myth Two: A local competitor selling a business in Tucson or Southern Arizona sold the business for X times revenue a few months ago, so mine must be worth at least that much.
False. The 3 things that determine the price you can ask for your business are:
a) The cash flow it generates
b) The buyer’s or investor’s required rate of return
c) The expected growth in cash over foreseeable future.
Rarely will a buyer pay for projected future revenue unless there is a VERY compelling case to be made. Establishing a value for the business is based on the confidence that the historical financials you have provided are a reliable predictor of future business performance. It is based on upon what a buyer can reasonably expect to generate in their pocket based on past historical information.
Myth Three: My business loses money, so it isn’t worth anything
False. Many businesses lose money. But that does not mean that have no value. The most common valuation for a small business is called Seller’s Discretionary Income. It involves pretax profit, owner’s salary, owner’s perks, interest and depreciation. We all take money out of our business for personal uses. But clear documentation is necessary of everything that is taken out at the owner’s discretion as a personal expense in order that it can be added back to show a potential buyer that these personal expense are actually income that the business is generating for the owner. This is critical to establishing value.
4) Valuing your small business should only be done when you’re ready to sell or need a loan from a bank
If you are considering selling a business in Tucson or Southern Arizona and you wait until the moment you actually decide to sell to find out how much your business might be worth in the market you have missed the opportunity along the way to make or improve upon critical business decisions and estate and planning issues.
If the Tucson or Southern Arizona business that you are selling is to have a life after you, you should value your business at least once a year. If you knew what your business was worth today, we believe you would certainly begin tomorrow to take steps to increase its value. Don’t wait until you want or need to sell your business in Tucson or Southern Arizona to discover the ways you could have increased the value of the business
Money is not the key motivator behind a person’s decision to buy a business in Tucson or Southern Arizona, or make a Tucson Business Investment. Countless studies have shown that it is more about freedom, lifestyle, and the desire to be their own boss. The money the business generates is the by-product of this broader decision.
If you want to sell a business in Tucson or Southern Arizona, put yourself in the shoes of someone who may be considering buying a business in Tucson or Southern Arizona, or making a Tucson Business Investment, and be prepared to showcase and sell the benefits of the lifestyle you lead as a result of the business you own.
If you’d like more information on this subject, please Contact Us.