90%
Up to 90% of the business owner's net worth is tied up in the business
75%
For lack of planning approximately 75% of businesses never sell
66
There are 66 potential obstacles to the successful sale of a business.
One moment while we verify your account.
If you become a newsletter subscriber you have free access to the entire website.
In Issue #56, we discussed the number one obstacle to the successful sale of a business - the Business Owner's Failure to Plan for a Sale. This issue will discuss the very common obstacle of Inadequate Seller's Discretionary Earnings (SDE).
A Favorite Famous Quote
"Business without profit is not business any more than
a pickle is candy." Charles F. Abbott
Most small businesses are valued as a multiple of Seller's Discretionary Earnings (SDE). In Issue #6, we briefly defined SDE as the net income (or net loss) on the company tax return + interest expense + depreciation expense + amortization expense + the current owner's salary + owner's perks. (CAUTION: as indicated in Issue #6, there are many other factors that might affect the calculation of SDE.) It would be a good time to re-read Issue #6 - How Small Businesses Are Valued Based on Seller's Discretionary Earnings (SDE).
|
Inadequate seller's discretionary earnings (below $100,000) is a major obstacle to the successful sale of a business. |
To justify the investment to acquire a business, most prospective business buyers need to pay themselves a reasonable salary for their efforts in running the business. The pool of buyers looking for the potential to make six figures ($100,000+) is huge, which creates demand in excess of supply, ultimately leading to higher multiples to maximize business valuations. For a prospective buyer to pay himself close to a $100,000 salary (after debt service on the acquisition), he'd have to acquire a business with Seller's Discretionary Earnings of about $150,000 at an acquisition price of approximately $375,000 to $450,000. (CAUTION: The above are general numbers that may not apply to all industries or situations).
Most of the time, if other obstacles are not significant, businesses with Seller's Discretionary Earnings between $100,000 and $150,000 in SDE can be sold. As SDE decreases from $100,000, so does the likelihood of a successful sale. If SDE is below $75,000, the likelihood of a successful sale is greatly diminished.
In today's business climate, obtaining lender financing for business acquisitions that have less than $100,000 in SDE is extremely difficult. For more information, read this article: Issue #61 - Business Acquisitions that Cannot be Financed.
Here's the bottom line: .......
This 90-issue email newsletter series provides information about:
This 90-issue email newsletter series provides information about:
The newsletters provide information on:
Preview our free special report:
Insider Secrets to Selling Your Business
Packed with insider secrets to help you begin the process of thinking about your exit strategy. Whether you intend to sell in two years or ten years, this is a MUST READ!
Read our valuable free white paper:
Why It's Important to Plan the Sale of Your Business
If an owner recognizes the need to plan for their business sale and executes a plan to identify and address the obstacles to a sale, the 3:1 odds against a successful business sale can be reversed to 3:1 in favor of a successful business sale.
