When Selling Your Business, Do Sales Really Matter?

sales matter when selling a business, bookkeeping newmarket, bookkeeping GTA

Selling a business can be very stressful and I don’t envy business owners that do.

Recently, one of my client’s Luke Skywalker, lamented the fact that he could not sell his business.

As we sat down over coffee in his franchised burrito restaurant, Luke was complaining that he could not find a single buyer.

During my meeting, Luke kept telling me the potential of his restaurant called the Death Star.

Luke went so far as to point out a few new subdivisions of homes that are being built in the town where his restaurant is located.

“Sales is a strong punch, but it’s not everything”

Luke keeps arguing with me that “sales is a strong punch, but it’s not everything. This business has lots of potential for any buyer”.

Luke has only owned the Death Star for about a year and now wants to sell the Death Star.

The problem is, the Death Star’s sales don’t match the asking price, from the figures that were given to me.

Although I’ve tried to explain to Luke, that sales are in fact THE only thing that matters in selling a business.

Everything else, like location, cleanliness of the store, etc., is way down the list.

Sales Really Matter When Selling a Business

After my meeting with Luke, I decided to ask some realtors I just met the other day at a BNI meeting.    

I asked them flat out “my client is looking to sell his burrito restaurant; however, his sales are not anywhere near what he is asking. He keeps arguing potential, potential. What is your opinion on that?”

“Sales are very important. The only way to get a potential buyer to even look at your business, is sales. Strong sales will generate interest. I remember a fellow who had a burrito restaurant in town that he was looking to sell, however, he was ‘out to lunch’ on his selling price.” Said one commercial realtor, who wished to remain anonymous.

Gross Income

During my research for this blog post, I came across two interesting concepts: gross income and net income.

Buyers can look at a business through how much gross income the business generates annually. Also known as a Gross Income Multiplier or GIM.

Buyers in this category look at how much income the property generates divided by its sales price. This approach does not take into consideration expenses like taxes, maintenance, payroll and other costs.

In this case let’s supposes the Death Star has an effective gross income of say $35,000. Now a comparable business has an effective gross income of say $40,000 and a selling price of $160,000.

The GIM would be $160,000/$40,000=4

That means a buyer would be willing to pay 4 times (4x) its effective gross income. Using this multiplier, we can now say that the business is worth $35,000 x 4= $140,000.

This does not take into consideration the expenses that are needed to keep the business running like inventory, utilities and rent to name just a few.

Net Income

Now let’s take the example above and let’s suppose Death Star’s income is $55,000 after all expenses paid and a comparable business has $50,000 in net income. The comparable business is selling for $200,000.

In this case the valuation would be Net Income divided by selling price

= $50,000/$200,000= 4%

The buyer in the case would be willing to pay 4 times (4x) the net income the business generates.

This is the preferred method by investors as it considers the amount of money the investor can put into his/her pocket at the end of the day.

Conclusion

Luke can argue “potential’ until the cows come home, the reality is sales and income matter.

A buyer will purchase a business based on the businesses ability to generate income.

It’s always been this way and will always be this way. Why do pension funds buy GM stock? For its ability to generate income.

My discussions with several realtors at different times and places, all confirm this.

After the deal is signed, the purchaser will need financing. Some banks are less risk averse than others.

See what banks want to know before you get a loan https://accountingprofessionals.ca/what-banks-want-to-know-before-approving-your-loan/

You want to get the most amount of money for your business, don’t you? It all rests upon how good your bookkeeping is. Call Mathew first at 289-500-1978 or info@accountingprofessionals.ca and get your books in order first before you list it for sale. No bookkeeping no sale.