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Future Profits Accrue to the New Owner
There are many factors involved when it comes to selling a business, including determining a fair asking price for it. The data that goes into such a determination may be gathered from a company’s financial statements, based on current competition in the market and drawn from other factors. Other factors which impact the valuation and sale price can vary depending on the industry, but in general it’s important to remember that future potential profits of the company belong to the new owner, not to the seller.
How Future Potential Can Boost Your Business Sale Price
When a company has many potential clients in the pipeline, sellers will often use this as leverage for marketing a slightly higher sale price. Potential investors and buyers will often want to see proof of profitability and if you can show them that these profits are likely to continue well into the future, it might help you fetch a higher selling price.
To help encourage a potential sale, you might work to create streams of recurring revenue before the sale is complete. Finding ways to increase business that will generate income for the new owner right from the beginning is certainly an appealing incentive for purchasing a business. However, as a seller you can’t expect the buyer to hand over future potential profits as part of the asking price. It’s your decision to sell at this particular time and any benefits from future profits belong to the new owner.
Many Factors Play a Role in Business Valuation
Future prospects or clients can influence the multiple, a valuation tool that’s used to determine how much a business is worth. Many sellers overestimate the multiple based on potential clients, competitive advantages, opportunities for growth and historical financial performance. While these things are all important and can help drive up the asking price, numbers still have to be considered reasonable among buyers based on current performance of like businesses in the marketplace.
Depending on the industry, there are certain understood standards for determining the multiple. Unfortunately, there’s no set, tried-and-true formula for assigning the multiple for a sale transaction. It can be compared to attempting to replicate a restaurant recipe in your home kitchen: you may think you have it figured out, but you’re never 100 per cent sure you’ve got it exactly right.
What sellers and business brokers can use are various indicators that help assess a fair multiple range:
- Size of revenues and earnings
- Future potential growth
- Stability of those future earnings and potential growth
Direct Benefits of Future Profits Belong to the Owner
Regardless of how much recruiting you’ve done for a new client or how much you’ve managed to sell them on, the bottom line is that the direct benefits of future profits belong to the owner. While they may elevate the selling price slightly, you can’t expect to benefit financially from a larger asking price that’s based upon assumptions of future revenue.
The most reasonable approach is to avoid disappointment by keeping price expectations in check. Instead, focus on your previous achievements and how historical profits and past performance contribute to the overall stability and future profitability of the business you’re selling.
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