Why Would a Business Sell for Less Than It Makes Per Year (Annual Sales Revenue)?
If you’re a business owner, you might dream of the day when you’ll be able to step back from day-to-day operations and offer your business for sale. Selling your business is much more than a simple transaction, though, as each step requires careful thought.
One of the more complex parts of selling a business is determining how much it’s worth to potential buyers. Business valuation is typically done by a qualified appraiser/business broker, who, after weighing a variety of factors, may determine that your asking price should actually be less than what your business makes in a given year.
Here are a few possible reasons why that may be:
It Simply Isn’t Profitable
If all you see is a business’s substantial revenue, it’s easy to assume it rakes in a hefty profit, but don’t be fooled: A business’s Revenue or Gross Sales is not a reliable indicator of its total value.
When you’re selling your business, it’s important to accurately determine its fair market value. The best way to do this is to multiply your seller’s discretionary earnings (SDE) by your industry multiplier.
The SDE is the total profit a business brings in for its owner — that’s you — while the industry multiplier is a more complex figure that’s almost always determined by a business appraiser.
In establishing an accurate industry multiplier, an appraiser looks at several factors, such as the following:
- Your industry and its current market trends
- The size of your business
- Tangible and intangible assets
- Whether a large amount of your profit is due to your personal brand
It’s entirely possible that when you multiply your SDE by your industry multiplier, you’ll get a value that is far less than your total revenue. In such an instance, your business would likely sell for less than it makes per year.
Sales Aren’t Sustainable
Unfortunately, achieving a sales record one year doesn’t mean that you’ll meet or exceed that record the next. We’ve seen that exact phenomenon in action with pandemic sales. Amazon’s sales (and profits) soared at the height of the pandemic, but that surge in sales, while impressive, proved to be temporary. As the pandemic has started to fade, Amazon has seen enough of a decrease in sales to begin laying off a considerable number of workers.
Essentially, a boom in sales looks great to buyers, but if an appraiser determines that those high sales aren’t sustainable, a business may ultimately be sold for less than its previous year’s revenue.
A Favorable Deal Structure Outweighs the Price
In the process of selling your business, you and your business broker will negotiate a deal structure that works well for both you and the buyer. If it’s attractive enough, it may ultimately matter more than the price.
For example, you may want to continue to work part time for the next 5-10 years but you want to take some chips off the table to lessen your load. The terms of your salary and bonus would possibly be more important than haggling over the price paid at the closing.
In that case you may want to make this offer work since you are able to reset your work/life balance going forward.
Interested in Selling Your Business?
Particularly, if you’re a first-time seller, offering your business for sale can become an overwhelming proposal, but when you work with Sunbelt Business Brokers, you’ll have expert help and guidance in every step of the way. With Sunbelt’s free business valuation calculator, you can determine how much your business is worth.
We pre-screen all of our potential buyers to streamline the sales process. We sell more businesses than anyone in the world, and we’re committed to getting you the best price and deal structure for your business, so if you’re considering selling, contact our team today for a free valuation and consultation!