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Role of Profitability In Selling A Business

Selling a Business

Role of Profitability In Selling A Business

When selling a company, how important is profitability? We take a look at the role profits play in helping to sell a business.

Most business buyers like to see a track record of profitability in a business that they are considering buying.

Typically, buyers want to see profitability for at least the last two years when they look at company financial statements. Beyond simply not running at a loss, it's ideal if the business is kicking off enough profits to provide the business owner with a decent living.

If a business has been losing money in recent years, it's going to be much tougher to find a buyer and certainly more difficult to obtain premium pricing when the business is sold.

Without profits, the population of potential buyers becomes more limited. Only buyers who see turnaround opportunities for the company or who have strategic reasons to buy the company will be interested in making an offer.

Moreover, business buyers tend to make low-ball offers when a business is for sale that is losing money. Whether it's appropriate or not, they may sense desperation on the part of the seller. Buyers may conclude that they can buy the business on the cheap.

Everything else being equal, profitable businesses will find many more suitors and will command a higher business sale price than companies that are running in the red.

Nonetheless, there are some exceptions to the rule. For example, a start-up company with a phenomenal product may not be making money but might be a very attractive acquisition for a larger company.

Even if this is not your exact situation, you can still sell a business that is losing money. In this case, however, you need to have a good explanation as to why the company is not profitable and have a believable story as to how the new owners can expect to get the company to profitability again. For instance, maybe the business is losing money simply because it lost a big customer that went bankrupt. The selling business owner might make the case that the business can now sell to the folded company's competitors and that doing so will likely restore company profits.

If the argument is credible, buyers will still be interested in buying the business. In some cases, buyers might also have their own ideas as to how they can get the business profitable, such as by offering a new business line or expanding geographically.

Clearly, you are better off selling a company if you are profitable. Relative to selling a money-losing business, it puts you in the driver's seat for defining the price of the business and for defining business sale terms during the negotiations process as well.

So should a business that is losing money hold off on selling out?

Not necessarily. It all depends on the specifics of the situation. In some cases, the owner may not see much light at the end of the tunnel.

If you forecast that your losses will only get bigger in the years to come, now is absolutely the right time to sell a business.

On the other hand, if you believe you can get back to profitability in short order, over the course of a year or two, it may be worth your while to soldier on in running the business and put the business sale on hold.