Determine Your Company’s Purchasing Price

ORLANDO, Fla. — Business owners thinking about selling their company must ask themselves a simple question — what is my business worth? In the search for answers, many business owners incorrectly look to their sales numbers, according to Barry Smith, Esq.

“Your sales numbers are irrelevant,” Smith said here at the 2010 AOPA National Assembly. “The issue is profitability. Is your business profitable? That is the bottom line.”

Smith said the evaluation range is 3 to 6 times your bottom line in order to determine your company’s worth. If your company makes $1 million a year in sales and your bottom line is 20%, then your company’s bottom line is $200,000. Therefore, your company, according to Smith, is worth anywhere from $600,000 to $1.2 million.

The factors that determine the evaluation range include the buyer’s motivation, the geography of the company, your company’s balance sheet and if there are multiple interested parties. Multiple potential buyers raise the purchasing price of your company. But if the buyer sees a balance sheet filled with debt, they will quickly turn to other opportunities.

“I see it all the time, a company has $200,000 in receivables, maybe $200,000 in inventory and $500,000 in debt,” Smith said. “When you are buying a business, you are really buying the company’s balance sheet.”

According to Smith, Hanger Orthopedic Group Inc., is known to buy companies and for business owners looking to sell, they are a great exit strategy.

“They are interested, motivated and willing to write a check,” Smith said.

Smith advises his clients who are interested in selling their business to negotiate the right price and terms. It sounds simple, but owners must avoid the temptation of simply following the advice of friends or colleagues in the field. Business owners may be motivated to sell for numerous reasons, from wanting to enter a new field, to being burnt out from the paperwork and processes. Still, Smith suggested taking the time to talk to a professional who can negotiate for the highest purchase price.

“Most of the people I talk to, even after going through all the hoops, are unsuccessful,” Smith said. “The two parties just can not agree on terms or the employees hear about the sale and leave or the attorneys are becoming obstacles. Sometimes deals just don’t happen.”

Leave a Reply

Your email address will not be published.