The value of a business for sale depends on a number of many factors.
Some of the most important are:
- Cash Flow: This can be represented by many terms like seller discretionary cash flow, EBIT(earnings before income taxes), EBIDA (earnings before income taxes, depreciation and amortization) or free cash flow. Basically what all of these terms focus on is that after all the business related bills/expenses are paid, how much cash is available to the business owner for personal use. This is undoubtedly the most important factor.
- Asset Values: The biggest impact here is if real estate is included in the sale. Other valuable assets can be patients, special technology, special equipment, a work force of specialize employees that are hard to find and hire in the market place, mineral rights, valuable long term strategic contracts, special licensees that are impossible or hard to acquire such as alcohol, gambling, health care, etc.; and valuable strategy customers.
- Financial History: Most favorable are companies that have good, multi year sales and income growth. This is a big positive. Stagnant companies are held with less esteem. Companies with multiyear declining sales and/or income are viewed negatively and priced accordingly. Condition of furniture, fixtures, equipment and premises: things that sparkle and shine sell quickly and at higher prices. Equipment in poor operating condition or needing replacement is a big negative and effects price corresponding and the ability to sell the business.
- Location: In many business segments location is critical, particularly retailers. In manufacturing and distributing, locations near major transportation arteries are crucial. Also, availability and costs of transportation. If a business has a location that limits or excludes new competitors, this has a every positive impact on value. Examples could be historic districts, government zoning or other restrictions, high cost of available locations, etc. Conversely, if locations for competitors are plentiful and/or cheap, this is a negative particularly if the business facility is not up to date and is inviting competition.
- Competition: The more and intense the competition, the less the value. The greater the future possibility of competition, such as lower barriers to entry of new competitors, the lower the value.
- Economy: Obviously good economic times bring better values for businesses for sale and quicker sales than poor economic times.
- Marketing: The better a business for sale is marketed, the higher the value and quicker the sale. The greater the market share a business has the greater its value. The larger and more diverse the customer base, the greater the value. If a business gets a large percent of its business from one or a few customers, this diminishes the value of the business. The higher the percentage the greater the effect.
- Financial Records: Businesses with good financial records are highly prized and are of greater value. This applies not only to the records themselves but also to the timeliness to which they are produced. Some businesses owners do not fully report in their financial records and tax returns all of their income so as to minimize their tax liability. This can have a serious negative impact on the value of a business for sale depending on the extent of underreporting. Buyers are much more likely to pay top dollar for a business for sale when documented evidence supports the asking price. Buyers like to see financial records that are very current.