The biggest problem with selling a new business is that there is usually no track record upon which to base a valuation. A new business can be defined as one that has been in existence for less than three years. To sell a business without a substantial track record, all you really have to sell is hope. This does not mean that the business cannot be sold. You will need to develop a realistic but attractive pro forma. It will also be useful to list (and value) all of the expenses you have incurred to get the business started, the expenses that someone beginning a similar business would have to pay for. For example:
- Legal and accounting expenses for corporate entity set-up.
- Logo design, stationery, brochures, flyers, etc.
- Salable inventory and other material costs.
- Advertising costs which have promoted the company name and existence.
- Special tools, fixtures, and other capital expenses to outfit the business.
If you are fortunate enough to have a profitable business which has not been in existence for long, you may still be able to sell it based on a traditional valuation. But, most buyers will want to use the capitalization rate of 30% to 40% or even higher. This will, of course, drive the business valuation down, but that will be the price you pay for someone assuming a very risky and basically unproven business.
When it comes to selling a new business, the obvious question will surely be “If the business is relatively new and making money, then why in the world does the seller want to sell?” The real key to selling this type of business will be to have a very plausible story to tell about why you want to sell. Divorce, relocation, not enough capital, early stage burn-out, sudden illness, all of which are very valid reasons for selling a new business.
The tips I’ve shared in this post are good tidbits to think about. However, if you’re interested in getting more information about selling a business, I encourage you to look at my other articles, where I go into much greater detail. Here you can find all the articles I’ve written, as well as some from other advisors, about selling a business. Thank you for reading, and good luck with your business goals!
About Lisa Sharp – Based out of Pensacola, Florida, Lisa has worked in commercial real estate since 2000 and specializes in business brokerage and commercial sales and leasing. Her experience as an owner and operator, of multiple businesses, makes her especially qualified to help clients purchase and sell businesses. Click here to read her full bio, or if you would like to contact her, you can call her at 850-610-8339, or email her at [email protected] You can follow her on Twitter at @lsharpsvn.
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Methods for Valuing a Business: Part 4 – The Capitalization of Current Net Earnings Valuation