People sell businesses for many reasons. Sometimes the sale is forced upon them. Other times it’s very much voluntary. If you’re in the lucky position of having a successful business and being able to pick and choose when to sell, there’s a lot of factors to consider which can affect the price:
The Economic Cycle
One of the biggest factors that influences the price of a business is the economy. When the economy is doing well, when people feel good about the future, and even better if money is being lent out by banks easily, then that can all help to push up the price of businesses. If the person you’re looking to sell to feels optimistic, they’re likely to pay more, right?
Whereas when the economy is down, when employment and growth figures don’t look good (or are even contracting), money is difficult to borrow. When this happens, people are far less likely to buy businesses, and if they do, they may be particularly price sensitive.
Your Market’s Future
Another huge consideration is your market:
- Is your market growing, shrinking, or stagnant? A growing market, or even better an aggressively expanding market, signals huge potential. And since the acquirer of your business often thinks they know how to get the most value out of it, playing to that assumption can help you to receive a higher price.
- How much competition is there, and does your potential acquirer feel they can compete? Sometimes (in fact, often) a business is acquired just to get rid of a competitor, and to help consolidate their position in the market.
- Do you know who to sell to? For example, perhaps you’re a student of law and are planning to build up and then sell a law practice. Well, as well as finding potential suitors for your business by hand, third party services like LawBiz can handle many aspects for you, and can help you attract a better price.
Your Business’s Potential
Another vital consideration is how your business is doing financially. If your business is struggling or even shrinking, then you’re in a very weak selling position, and this places the buyer in a strong position. This gives them leverage to take time over the deal, negotiate special privileges, and ask for a lower price, since you’re desperate to sell and they’re not desperate to buy.
Whereas, at the other extreme, the faster your business is growing and the more profitable it is, the easier it is to sell. Again, any acquirer is going to think that they know much more about how to grow your business than you do. They may be right about that, but more often than not it’s their pride. So take advantage of that pride to help you get a better price, since if they really believe in their own genius, then paying more for an asset they can quickly make more lucrative is a bargain for them, right?
So the better your business, your market, and the economy is doing, the more money you’ll make selling your business. But then the question becomes: if everything is going great, could you perhaps actually make more money keeping your business and just growing it? Food for thought.