Most business owner’s begin their journey into the American dream by opening their own small business, with the intention of keeping this business in the family for years or even generations to come. But alas, reality may come knocking, retirement is around the corner after working 30 years in your business, or needing to relocate, or health issues, or your children never wanted the business, etc.
Most small business owner’s do not have an exit strategy in place when they begin their journey. When life takes that turn, when the owner decides to sell, and question how much their business is worth, it is difficult to assess businesses that never kept good books, or putting a price on your sweat and tears into bringing their business into reality. But don’t fret, there is always time and ways to properly value a business. So, is your small business worth what you think?
A good percentage of buyers and investors have become very savvy when it comes to buying a business, hence why sellers must know how to properly fix or start a new business. Back in the day, a good buyer would be street savvy, and learn how well the business was doing by seeing it perform for a couple of days. Now a days, the internet has brought another factor, how presentable are you in reviews, social media, and internet sales. The reality is that a new buyer or investor only has so much affordability to pay for your existing business. Financing has become much more difficult since lenders are not interested in taking risks that could walk away fairly easy.
How involved in the business are you? When a small business is 100% owner operated, they typically sell for low earnings multiples due to the owner participation. In this instance, the buyer is actually purchasing a “job” for themselves. Businesses where it is owner operated typically sell for 2 – 3 times the annual earning of the company. Estimates for a business that earns around $100,000 per year should sell for $200,000 – $300,000. Of course, these multiples expand with annual earnings. On the other hand, businesses that earn millions of dollars per year with paid management and “hands-off” ownership fetch much larger multiples.
Banks or lenders participating in the Small Business Administration’s lending program typically want to see new owners pay no more than 3 times annual earnings for a small business. Many buyers are not cash buyers, and therefore need some form of financing, hence why smaller owner operator businesses will find it difficult to fetch a price higher than three times earnings for this reason.
One thing owner-operated businesses do have to their advantage is immigration. One of the fastest way into the United States is to buy or start a new business that employs at least 10 people. In rural areas, or where unemployment is 150% the national average, foreign investors and operators can invest $500,000 to obtain and EB-5 visa. There are many other visa programs the USA government offers in order to inject money into the local economies, and for that we suggest talking to an immigration lawyer that deals exclusively with investment visas. When a business is sold to an investor you do want to make sure your books are all in perfect shape since the IRS and Immigration will be involved in the process.
If you need your business evaluated, get a free consultation when you call us or book directly via our Facebook fan page.
Hope to hear from you soon,