Edison Avenue believes it is important for sellers to understand factors influencing the sellability of a business.  Please add the numbers for each of the questions below.



Present Growth:​

When comparing your last complete fiscal year with the previous year, how much did you grow your revenue?
Flat or lower=1​

0–10% growth=2​

10–20% growth=3​

More than 20% growth=4.

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Future Growth:​

What do you project your top-line revenue growth to be over the next 12 months?
Flat or negative=1​

0–10% growth=2​

10–20% growth=3​

More than 20% growth=4

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Receivables Turnover:​

When do you ask your customers to pay you?​

100% upon receipt=1​

Upfront deposit followed by balance upon reciept=2​

Upfront deposit followed by multiple payments prior to receipt=3​

100% upon agreement to buy=4.

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Business Plan:​

Which of these statements best describes your business plan?
Nothing formal=1​

Calendar year revenue & profit goals=2​

3-year revenue & profit goals=3​

3-year revenue & profit goals with plans for disciplines, e.g., marketing, sales, finance, etc.=4.

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Customer Diversity:​

In your last complete fiscal year, what percentage of your overall revenue did your largest client represent?
More than 50%=1​

25–50%=2​

15–25%=3​

Less than 15%=4.

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Owner Involvement:​

Over the past 12 months, what percentage of your revenue was a direct result of your personal sales efforts (or those of your equity partner[s])?

More than 50%=1​

30–50%=2​

10–30%=3​

Less than 10%=4.

A standard service offering describes your specialty. It outlines your unique process or the spin that differentiates you from your competitors in the same industry. If you sell a product, it can be your unique approach to providing your product. Usually, a standard service offering is branded and has a unique name that you own.

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Product Diversity:​

Given the definition above, over the last 12 months, what percentage of your revenue came from your standard service offering?
Less than 50%=1​

50–75%=2​

75–90%=3​

More than 90%=4.

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Transaction Rate:​

Which of the following frequencies describes how often your customers need to buy your product or service?
Only once=1​

Once every few years=2​

Every year=3​

More than once per year=4.

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Management:​

Which of the following statements best describes your management team?

No team=1​

Couple senior people acting as informal leaders=2​

Managers in charge of sales/marketing and production=3​

Management team with compensation package providing long-term incentive to stay with company=4.

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Employee Turnover:​

What percentage of the employees that were with you 12 months ago are still employed by your company today?
Less than 50%=1​

50–75%=2​

75–90%=3​

More than 90%=4.

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​Scoring:
10-20 Business is a difficult sell.  Sale requires effort to improve the business fundamentals.
21-30 Business is marginally saleable and under normal circumstances should sell in 1 to 2 years.
31-40 Business is saleable and  under normal circumstances should sell in 3-12 months.​
 

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Primary determiners of price:
​

Past performance – Businesses typically sell at or around industry multiples for revenue and cash flow/EBIDTA.  In rare circumstances, buyers will pay for forecast or projected performance on an earn-out basis.
​

Individual needs – Buyers will expect a fair salary for managing the business.  This salary is expected to be at or near the average salary for a non-owner business manager.
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Debt service – Buyers and their financiers will expect debt coverage, i.e., average monthly cash flow or EBIDTA to monthly principle and interest payment, greater than 2:1 or 3:1 depending upon the size of the company and risk.
 

Investment return – Beyond the salary for managing the business, the buyer will expect to receive a return on his/her investment or down payment commensurate with the risk, usually 15 to 20%.
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Other determiners of price:
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Industry cycles – Businesses experiencing industry cycle may sell at a higher or lower price depending upon the timing of the transaction.  Businesses should sell at their highest price immediately before the industry peak.
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Seasonality – Businesses experiencing seasonality may sell at a higher or lower price depending upon the timing of the transaction.  Businesses should sell at their highest price immediately before the seasonal uptick.
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Assets – Businesses with idle assets are typically discounted by buyers because of the cost and distraction of disposing of the idle assets.
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Cash sale – Cash sales in today's market are rare.  Cash transaction historically sell at 70% of list price.
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Financing – In today's tight capital markets, bank financing can be difficult.  Seller financing is almost a given.  Seller financed transactions historically sell at 86% of list price.​

Interest rates – Low interest rates provide the buyer with improved cash flow, a better return on investment, and benefit the selling price of the ​

business.

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Strong management – Experienced management who can run the business with an absentee owner and is committed or locked-in to staying can reduce or eliminate the deduction a buyer expects as a salary and increase the price of the business.
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Proprietary technology – Patents, copyrights and other proprietary technology providing a sustainable competitive advantage increases the value of a business.
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Financial synergies – If a buyer is able to combine the business with an existing business, he/she may be able to reduce overhead, improve cash flow, and pay more for the business.
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Geographic location – Desirable locations increase the number of potential buyers which may or may not result in a bidding war.  If a bidding war results, the price will likely increase.
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Strategic fit – Certain buyers may see a strategic benefit with other owned businesses.  Benefits may include shared customers lists, make vs. buy cost reduction, etc..
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Risk perception – Risk factors can be measured internally, e.g., the buyer's own confidence in managing the business, as well as externally, e.g., the economic forecast, industry and competitive trends, etc..