One thing I’m learning through the acquisition process is that small business founders too often overvalue their businesses.
I, too, am a founder. My first business, Blackbird e-Solutions LLC, is my first baby. I put a lot of sweat and tears into making it a vehicle that supports me and my family.
However, I realize that if I were to sell it, it would be worth what the numbers tell us. Sure, it has “great potential,” and the money and effort I put into it over the years is worth A LOT. But the valuation for sale would be based on a multiple of what the company made in the past 1-3 years.
Part of the problem is that Silicon Valley and the investment culture have made people think they should get a billion-dollar exit because they put “so much effort in.” Or that just because the company is making $1 million in revenue (and no profit), it can be sold for millions of dollars.
The reality is that only rare companies get to that level.
If your company makes $100,000 in profit, you likely can’t sell it for $1,000,000. I probably won’t be over $500,000. Currently, multiples are typically between 2-5. Some businesses like SAAS push the multiples higher, though.
So, if you want to sell your small business, take a deep breath. Then, look at the numbers. Be realistic with what the company has made over the last 12 months. Then, use a multiple of the profit to get your asking price. Remember, revenue is important, but the business will be evaluated on the amount of profit.
When you see that number, do you still want to sell?
