How does one set a selling price for a bookstore?
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Sharon asked:
I have an English and Spanish language tourist bookstore that has been open for 5 years in Guatemala that I would like to sell. How do I decide on a selling price? How much financial information should I reveal to potential buyers? I am sure that potential buyers will want to know if the business is viable, but it seem strange to show financial records to people who may not even end up buying the business. Any suggestions? Any suggestions on where I could post this sale online?
ANDY
I have an English and Spanish language tourist bookstore that has been open for 5 years in Guatemala that I would like to sell. How do I decide on a selling price? How much financial information should I reveal to potential buyers? I am sure that potential buyers will want to know if the business is viable, but it seem strange to show financial records to people who may not even end up buying the business. Any suggestions? Any suggestions on where I could post this sale online?
ANDY
December 26th, 2009 at 10:48 pm
ALONZO
To compute the sellling price taking the profit from the current profit and loss statement, add back any expense that will not pertain to the new owner, such as officer wages, interest on debt the new owner will not have and depreciation. This will increase the bottom line profit. Multiply that profit by 2.5%. This should be a good starting point for your asking price. You should not need to show any financial records to a prospect until they have put a refundable deposit on the table. This information is assuming you are selling assets only not company stock. Inventory should be paid for separately at settlement.
December 28th, 2009 at 11:33 am
CARY
Have you considered hiring a business broker to sell the business?
I’m an ex-investment banker and currently a private equity professional (I buy and sell businesses for a living). I have over ten years of experience doing just that… and sometimes it still makes sense for me to hire professionals.
First of all if you can find someone who specializes in either selling travel bookstores or businesses in Guatemala, or better yet, both their knowledge of the markets and prospective buyers is irreplaceable.
From your questioning, it sounds like you have never sold a business… would you sell your house yourself?
A good place to start is with your lawyer, he’ll probably have a couple of ideas of people who can help you… also your accountant, _may_ have knowledge, but generally they are not the best source of information.
A couple of notes on EBITDA: (earnings before interest tax depreciation and amortization - basically what was stated above, but with a little different twist: Take your net income for any period, add back any interest, taxes, depreciation or amortization that was charged (your accountant will be able to give you the number) plus any compensation or expenses that might be considered…. ummm… owners compensation: autos, clubs, subscriptions… your plane flights in January and March to Guatemala that might include other family members that are “consultants” to the business…. etc. This number is your EBITDA (owner adjusted). (I don’t know the book business, so there could be another metric used, sales, books sold, etc… but generally EBITDA is a good start). Why, EBITDA is the basically the cash flow of the business before the owner makes choices about how they are going to capitalize (finance) the business… people with big loans pay lower taxes… people that buy lots of new shiny equipment have lots of depreciation (the cost of that equipment divided over its useful life)… so someone new will have there own Net Income, but everyone should have the same EBITDA.
Now getting to pricing from EBITDA… that is the art that someone who knows your facts can help you. 2.5 times EBITDA is an ok metric… but the multiple (X times) changes based upon the size of the business… and the desirability of the business… I would best state that business of the same type tend to sell within a range most of the time (note the qualifiers) retail tends to be low, sorry, in the 2 to 5 times EBITDA range… but these are strange times… it used to be that you could say business generally sold from 3 to 5 times EBITDA… now 4 to 6 and 6 to 8 are happening if you are talking about big companies)… So at least talk to a professional and get an idea… consider paying for a valuation… but get lots of references and lots of quotes from people to understand what is a good deal.
Finally…. You are going to have to give information to people if you want to sell the business. How else are they going to know what it is worth? Three years of basic financial information is required… and five is even better if they show a consistent trend.
Your selling a business… that is a future stream of cash flows (yes, EBITDA)… no one can know what the future streams are so we all use the best indicator… past cash flows… I know that seems so strange in the world of “private” business… but you are asking people to buy your private business… they will want to know the facts.
A broker would basically put together a “blind” sheet that would give basic information about the business to gage interest and should ALWAYS require potential buyers to sign a confidentiality agreement… after they have proven to the broker (or you) that they are potential buyers, not your competitors, they have the right to ask LOTS of questions… how else will they know whether they want to buy the business and for what price? Imagine asking someone to buy your house but not allowing them to see it first… how would you ever do it????
You wouldn’t expect anyone to buy without looking over the house two or three times (in a real market!)… so expect the same thing…. but financials matter…
And you know what, there may be someone you don’t want to see the numbers who will… but the numbers are just history… they don’t allow people to do your business… only see how valuable it is… and that is the point.
I know this is a tough one…and what I’m about to say may even hurt more… once you are down to a couple of buyers I URGE you to tell them everything good and bad even shady if you have some of that… why? before a potential buyer becomes the buyer who is doing “due diligence” (the checking of all the facts you gave them in the sale process plus looking for things you didn’t give them in the sale process), anything you left out will negatively affect the sale… you lose credibility… and thus the trust that gets a business sold goes away. The process will slow down to a crawl and you will be dead… because the old addage that I relearn every once in a while: “Time kills all deals” so make sure you “Disclose early and often” because “Disclosure will set you free.”
Best of luck to you… and really consider some professional help. This is one of those things that needs a professional!