The Equation that Destroys your Ability to Sell Your Business

The Equation that Destroys your Ability to Sell Your Business

What is the value of your business?  Wouldn’t it be nice if there was a simple equation that allowed you to know what your business was worth?  There is, and if you believe it without question, you may just have destroyed your ability to ever sell your business.

The article linked below includes an excellent example of the problem:

Let’s go back to what is value, and how do you determine it? It’s a simple calculation. Business valuators would argue with me and say that I’m over-simplifying a complex calculation matrix.

Business Valuation Equation

Business Valuation Equation

What does this mean? How do buyers determine the value of “X”? Let’s say that our gross sales are $100,000. Our multiple range “X” is between 3 and 7.

$100,000 x 3 = $300,000 $100,000 x 7 = $700,000

So, our business is worth between $300,000 and $700,000 to potential buyers. 

There you have it.  A simple equation.  Your gross sales times “a multiplier” and you know what your business is worth.

An equation like this is incredibly appealing to us as business owners.  It’s simple, we can understand it, and it’s easy to see how we grow value — by increasing revenue.   

The equation is accurate, to a degree.  This equation is just math, right?  The business sells for a price, we divide that price by revenue, the result is the multiplier.  Makes sense — but only if we look at the actual numbers.

BizBuySell.com does a quarterly report on the sale of small businesses.  4th quarter of 2017’s report can be found HERE.  In that report they point out that the “average sales price as a multiple of revenue” for businesses sold through their platform was around .6.  

Not six, but “point six”.  

Gross sales x .6 = business value.  Not nearly as sexy as 3-7 is it?  But it’s a number that is reality for most small business owners if they were able to sell their business.

But we rarely read an article that talks about .6.  We read the articles all the time that say 3-7.  And here’s what we do in our head — “even if I’m at the low end of that range, my business is worth . . . “.  Now, we’ve established a mental value for our business based on a simple equation we read in an article.  

We build on that.  We fantasize.  We become mental millionaires.  Only to learn, the hard way, when we go to sell our business, that an equation has warped our perception for the value of our business.

Be careful what you read, and what conclusions you draw.

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