The Right Price & Terms At Which To Sell Your Business
By: Mark R. Crossman, CA, CBI

It may sound simplistic to say that there is a "right price" at which to sell your business but there is such a price and it works. Every time.

There is a right price which will meet the needs and aspirations of all the parties involved in a business sale, the seller, the buyer, the buyer's lenders and the professional advisors for all the parties.

Does this sound familiar? Probably not. Most sellers start with a number in mind that satisfies their needs with little or no consideration of a buyer's requirements. If it takes a buyer to make a sale happen, this approach is probably backwards.

What are these buyer "needs" and how can they be used to help establish a market price for a business? There are four fundamental financial conditions which must be met before a business will sell in the conventional market. Let's look at these separately.

  1. The business must be able to pay the new owner a salary consistent with the job to be done. That amount should be approximately equivalent to the cost of hiring a manager for that business in that market.

  2. The business must have sufficient sustainable cashflow to allow the new owner to pay back the debt incurred to buy the business. The pay back must be over a reasonable period of time which should be consistent with the assets acquired.

  3. The business must be able to provide enough cash to replace the fixed assets as required.

  4. The business should have sufficient cash flow to give the buyer a reasonable return on invested equity or down payment.


Determining the correct return on investment is subject to a wide range of values which will be influenced by the inherent risk in the business and the assets being acquired. A high risk business in a rented facility might require a 50% after tax return on equity to attract a buyer. The same business in owned real estate may satisfy the same buyer with a 25% return on equity.

None of this is rocket science. Would you buy a business that would not meet these simple requirements? Hopefully not.

A business is a collection of assets assembled to produce cash. In selling a business you are selling sustainable cashflow, or more precisely, sustainable "transferable" cashflow. You must be able to convince a buyer that he or she will be able to get the same or better results after the sale that you achieved last year. That simply means that the cashflow is sustainable and transferrable.

We referred earlier to the right price and terms. What about terms? Many sellers will tell us that when they sell the business, they want all cash. They don't want to be worried about collecting those monthly payments. The facts are that the lowest possible price that an owner will get for a business is all cash. The discount from "market value" for an all cash transaction will frequently be 25%. If a seller financed 30% of a full price sale, then the real risk is only 5% of the sale price. Another important consideration is that a seller who accepts notes as part payment for the business has an ongoing investment in the one thing he or she knows better than any other investment option. The effective return is frequently above market. Finally, these notes can be secured by some pretty good assets such as a pledge of the shares being acquired or a second charge on land or buildings.

None of this matters if you have not made the decision to sell your business. However, when you do, it's important that you bring the business to market at a price and with terms that will "guarantee a successful sale."