Last Updated: 26-April-2016
Setting the RIGHT price
If your business is currently profitable then you should have a reasonably trouble-free time with pricing, since you have standing income to work with. The best valuation technique is to use a multiple of the Net Cash Flow you will receive from the business.
Net cash flow is: the difference between the revenue of the business and the necessary business-related expenses required to produce the revenue. You and/or your CPA should have these historical financial statements of the business to determine this number.
A Recast: is the addback of expenses paid by the business that were not necessary for the operation of the business…these are really additional owner benefits that need to be considered in Valuation. The majority of business owners run expenses through their business that aren't really required to operate their business. These can be expenses like cars, health insurance, cell phone plan, meals and entertainment. They may also pay themselves a sizable salary. Take the net income of the business and add back these expenses to determine the Actual net cash flow for your business.
The price for a successful single unit retail or service business should be about two to three times this net cash flow number. The more steady and established the cash flow, the higher the multiple. The multiple is also higher when the trends of the business growth are positive rather than flat or negative. The industry niche is taken into consideration as well…for instance some industries like Home Healthcare are very hot right now….so with a growing Net Cash Flow in this business you may be able to ask a higher multiple.
If your business is not currently profitable….it is more difficult to price. You may have many solid reasons as to why the business isn't performing, but in the end it comes down to whether you are convinced that a straightforward change in ownership will repair the troubles.
Frankly, most of the time this is a reality when the existing owner is not managing the business according to the method/operating systems designed by the franchisor. If you have knowledge that most of the other franchisees following the recommended methods per the Franchisor are actually are doing well AND you have determined that there are no other issues surrounding your lack of profitability, like a “bad location”….. Then it’s a bit easier to proceed.
You have to keep in mind that if you place the price at close to, or exceeding what it truly costs to open a brand new one – then the Buyer is likely going to give a fresh opportunity the shot instead…but if you can determine that you can get a fair price for the assets (inventory, fixtures, furnishings equipment and signage etc.)…and you can price it substantially lower that what is costs to open a brand new location…then you can price it to move!