Selling Your Small Home-Based Business
Can You Sell Your Home-Based Business?
The value of a business depends mainly on the earnings it produces, with the expectation that those earnings will continue into the future should a new owner take the helm. It also depends on having something valuable to sell that allows those earnings to be produced. So, if you have a small home-based business, here are some questions that can help you determine if your business has value in the marketplace.
Can a qualified person walk into my business, take over, and earn the same amount that I do?
If the business IS the owner, it would be an impediment to the chances of a sale. For example, if your business is derived from your personal reputation and/or relationships whereby the day you leave the business, so do the customers, it is not worth a dime to a buyer. The more you are separated from the ongoing viability and continued operations of the business, the better the odds of a new owner being able to keep it alive and well. So, if you’ve developed methodologies and processes for your home business that is indeed transferable and can be taught to a new owner in a manner that will allow them to take over and earn the money you have been earning, it is likely a marketable enterprise.
What are the qualifications to run the business, and can I reasonably expect to find a buyer with those qualifications?
If you need a person with specific skills or certifications that are not easily obtained in order to work the business, your chances of selling the business would be significantly reduced and can present a rather steep uphill challenge. For instance, a program design consultant or computer repair geek operating from home can’t expect to sell their business with much ease. Without the expertise of the consultant or the geek, the business is not worth anything. The field of prospective buyers capable of taking over such businesses may look more like a desert. Any business be sold in the marketplace needs as wide a field of prospective buyers as possible in order to be successful in selling it.
Do you really have something to sell?
Some home businesses are based on a formula or step-by-step directions that can be easily researched. In other words, someone else can easily start such a business without having to buy it. There must be some difficult barrier to overcome that prevents others from doing the business without paying you for it. However, many small business owners know more than they think they do. Some home-based business owners may think their business isn’t worth anything because someone else could probably just start up a similar company. Perhaps a few can, but not without substantial risk. That is exactly why people buy existing businesses – to minimize the risk of starting a new one. The following are items that minimize risk and add value to any enterprise:
- Ongoing and sustainable repeat customers
- Goodwill built up in the name of the business
- Proven methodologies and processes that aren’t easily reproduced
- Work-in-process or a Work Backlog
- Supplier relationships
- Website presence (a must in today’s marketplace to stay competitive)
The good news is that most home-based businesses are relocatable, so anyone, anywhere can purchase it. That is a big plus, especially given the fact that with today’s technology a small home-based business can project an image of a professional company working from the penthouse of a New York skyscraper. In fact, many buyers search specifically for relocatable or home-based businesses.
For market value purposes, the multiple of an owner’s discretionary earnings(1) for very small businesses is fairly low, probably averaging 2 to 2.5 times the discretionary earnings. The reason for this is that when someone purchases a small home-based business, it amounts to buying a job. The value of one job leaves no or little extra money for savings, which can also be defined as no return on investment (ROI). Therefore, it isn’t worth as much as a company that produces enough revenue for a salary AND savings.