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If the Business For Sale Doesn’t Make Money, Buying It Is Bad Business
Selling your business can be a life-changing event. There is a lot of work involved in running a business for sale, it must be done. As with many projects we undertake in life, preparation is an important part of successfully selling one’s business. Consider these business ideas when planning to sell your business.
To begin with, it should be understood that having a small business for sale involves evaluating some of the primary areas of your enterprise. These areas are positive and negative aspects that will affect the value. Of course there are endless variations between different businesses and even within the same category and type of business there will be variations. But for preparation purposes, here are the main things to consider.
We start with the property. Assets can be divided into categories such as cash, investments, equipment, accounts receivable, goodwill and real estate. Assets are valuable business assets that can be used to generate revenue and profits. To be a business a business must have some type of assets and must be able to generate revenue. So our first thought is: Does the business make money?
Clearly, for a business to have value it must be able to make money. How else could it be worth it? Businesses exist to make money; They are not there because they enrich people’s lives or occupy people; That’s what non-profits and government bureaucracies are for. Businesses exist to make money, bottom line.
Unfortunately, there are many small businesses for sale that are not making money, ie (they are not “cash-flowing”) but are being sold at a high price. If you ask sellers how they can justify the price, you’ll get answers ranging from “because we’ve put a lot into the business” to “because there’s a lot of money to be made in the future.”
The problem here is best understood by making a quick mental switch and putting yourself in the buyer’s shoes. now you Businesses are buying for sale and you Ready to write a big check to take over the operation and all its pitfalls and challenges and surprises. And you ask yourself this very basic, fundamental question: Am I willing to pay for something in the hope that I can get it back to me even if I no longer do it?
It doesn’t take an IQ above room temperature to realize that if you’re spending money to get that opportunity, you can’t hope to make money. In other words, you can’t pay for risk. The ancient equation of risk and return applies here. Deliberate risk-taking must come at a really cheap price, or no price at all. But to buy a business, a profitable business that has a current track record of making money, must come at the right price, even if it makes enough money, a high price.
The point of discussion boils down to this: If a business is going to sell for money, it needs to make money. Money is the reason we go to work every day. Some people say they work because they love the work, and that may be true, but after all, we are in business, pure and simple, to make money. If the business we are engaged in does not make money, it has lost its most basic quality and therefore has no value. Just as a real estate asset has value because of its scarcity and utility, and the buyer pays for the purpose of appreciating and using the property, a business has value because of its ability to make money, and the buyer pays for the purpose of doing just that…make money.
There are exceptions to this rule, but very few. An example might be a situation where a business buyer is buying an “idea” or concept. In this case, he or she may be buying a business to sell in a brand new market, where there is no competition. With that comes the downside of little to no income, where there may be a market but it’s not fully exploited. But these situations are extremely exceptional and should be approached with extreme caution.
Summary… When it comes time for a business owner to sell his or her business, it is important to prepare for the sale and think about how buyers will view the business. And one of the best ways to understand the sales process is to look at it from the buyer’s perspective. “Would I buy? Why or why not?” A business can have many wonderful things: the market, the product, the people… but if it doesn’t make money, for whatever reason, the buyer doesn’t want to pay for it.
And neither will you unless you do penance. But that’s another discussion…
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