Selling a Business Is Not Like Selling a Home
Before I started selling businesses, I spent a decade in real estate.
And one thing I've learned is that selling a business is nothing like selling a home.
With real estate, there are usually comparable properties nearby. You can look at what similar homes sold for, adjust for differences, and develop a relatively clear range of value.
Businesses don't work that way.
Two businesses in the same industry with similar revenue can have very different values.
That's because a buyer isn't simply buying the size of the business. They're buying its future earning potential and taking on the risks that come with it.
The Numbers Are Only the Beginning
Revenue and profitability obviously matter when valuing a business.
But buyers want to understand the story behind those numbers.
They'll look at questions such as:
How consistent are the earnings?
How dependent is the business on the owner?
Is revenue concentrated among a handful of customers?
How much revenue is recurring or predictable?
Are there key employees the business depends on?
Can the financials support acquisition financing?
How likely are customers and employees to remain after a sale?
Two companies can report similar revenue and profit while having very different answers to those questions.
And that can lead buyers to value them very differently.
Business Comps Aren't Real Estate Comps
Comparable transactions are still an important part of business valuation.
I use them myself.
But they need context.
If another company in your industry sold for a certain multiple, that doesn't automatically mean your business deserves the same multiple.
The other company may have had recurring revenue, stronger margins, less customer concentration, a deeper management team, or less dependence on the owner.
Or it could have had more risk and deserved a lower valuation.
That's why I always caution owners against saying:
"The business down the street sold for X, so mine must be worth X."
Maybe.
But you need to understand why it sold for that amount.
What's Happening Inside the Business Matters
A home is largely valued based on the property itself and the market around it.
A business is different.
Buyers are evaluating the earnings, the quality of those earnings, the risks surrounding them, and how likely they are to continue after ownership changes.
That's why preparing a business for sale involves much more than choosing an asking price.
If you're thinking about selling, don't just ask:
"What are businesses like mine selling for?"
Ask:
"What would a buyer see when they looked inside my business?"
When it comes to selling a business, the numbers matter.
But the story behind the numbers matters too.