For Sale By Owner

Money Matters

Even a well-kept business may need tidying up before it's put on the market. "Two key things to clean up are the balance sheet and the profit-and-loss statement," says Jack R. Sanders, a business broker who gathers sales data on small businesses and publishes it in his annual Bizcomps studies. "[Move off the balance sheet] all nonoperating assets, anything that won't go with the business, like a boat or a plane," Sanders says. "Next, if you haven't been reporting some of your income--and everybody knows some businesses don't--that's a fatal error. If you're making the money, you should put it on the books and pay for it." One big reason: Most sale prices are figured, at least in part, on the business's income. Underreporting it will undervalue the business.

Valuing the business may be the hardest part of preparing to sell. As with residential real estate, no two businesses can be priced exactly alike because of the unique nature of each offering. Sanders' Bizcomps is the closest thing there is to a real estate agent's list of comparable recent sales. Tabulating data on some 2,500 sales of businesses each year, Bizcomps offers some insights into what businesses of your type have recently sold for. For example, if a business in your field is listed as having sales of $1 million and as selling for $400,000, you can calculate that your own business might go for about 40 percent of your annual sales. Of course, comps are only approximations; the actual sale price is the result of negotiations.

"Almost all small businesses go for between one-and-a-half and three-and-a-half times earnings," Sanders says.

Because market conditions and the needs and finances of both buyer and seller vary from deal to deal, Lipman advises always selling by auction in order to nail down the right price. With the auction approach, multiple bidders in an open market establish the ultimate sale price by bidding against one another. Lipman says sellers should rely on the auction method so completely that they don't even establish a minimum opening bid: "That tips your hand as to where you expect to go."

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This article was originally published in the January 1998 print edition of Entrepreneur with the headline: For Sale By Owner.

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