The Profitable Exit: A Study of Sold Businesses  

Sell a business. Construction business, Business Valuation. Tampa Business BrokerA Study of Sold Businesses

This article will explain why smart business owners benefit from getting an early valuation, understanding what drives their value, and addressing those value drivers. Doing this makes their business more sellable.

Why Early Valuation Matters

By getting an early valuation, you understand your business’s true worth. This helps you see what drives its value and where improvements can be made.

Improving Sellability

When your records are in order and your business is well-prepared, it becomes more attractive to buyers. One major advantage is qualifying for SBA lender support. This allows buyers to acquire your business with as little as 10% down.

Benefits of SBA Financing

Qualifying for SBA financing makes your business more attractive, reduces the need for seller financing, and opens the pool of potential buyers significantly.

By taking these steps, you make your business more appealing and increase the chances of a successful sale.

Our Study

We studied businesses sold with and without lender financing. Here’s what our research of business broker supported business sales found:

Businesses with financing, like SBA loans, made more profit. They got more money from their sales and earnings. These owners made sure their businesses were running well. Their financial documents clearly showed profits after adjustments.

Sold Business Study in Early 2024

Our team started the “Sold Business Study” in early 2024. We looked at businesses sold since January 1, 2013. We focused on two groups:

Prequalification Group:

  • These businesses had secured financing, often through SBA loans, before selling.
  • Their earnings claims and marketing strategies were backed by tax returns.

Non-Prequalified Group:

  • These businesses had similar annual revenues ($1 million to $10 million).
  • They didn’t have lender prequalification.
  • Their financial statements were often based on owner estimates or annualized data.

Our business brokers, skilled in valuations and sales, compared these two groups. We wanted to see how lender prequalification impacted business sales. Many businesses struggle to exit successfully, so this study was important.

Between 70% and 85% of businesses don’t sell successfully. We looked at data from PeerComps, Business Brokers of Florida, and the Exit Planning Institute. Reports from Forbes and Inc. Magazines back this up.

What We Found

We assumed most business owners file taxes carefully and use accountants to lower taxes legally. But many owners are busy and might not use their financial data fully. We thought businesses showing finances through tax returns and getting lender prequalification would have an edge in selling.

Our study showed that businesses with strong financial records are more likely to get SBA or lender prequalification. This prequalification can make business sales smoother. But we didn’t find out if businesses without prequalification got SBA loans after finding a buyer.

Key Financial Ratios

We looked at three key financial ratios for both groups. This helped us understand the financial health and market position of these businesses, especially how lender prequalification affects sales.

Study Details

Our “Sold Business Study” covered over 1,300 businesses. We found 718 in the Prequalification Group and 689 in the Non-Prequalified Group. These groups were similar in size, showing an almost equal distribution over a decade, with a slight edge for the Prequalification Group.

How Different Businesses Perform

We looked at the average performance of two groups. The Prequalification Group had average sales of $2.3 million. The Non-Prequalified Group averaged slightly lower at about $2.1 million.

We also studied a subset within the Prequalification Group. This subset had average sales of $2.1 million to make a more complete comparison.

Understanding Earnings and Sales

We compared Discretionary Earnings (DE) to Gross Sales. DE shows the true earnings of a business. It includes adjustments for things like depreciation and owner’s salary.

We also looked at the Sold Price to Gross Sales and the Sold Price to Discretionary Earnings. These comparisons helped us see how sale prices match up with financial performance.

Key Takeaways

Our study highlights important points for business owners and advisors. It shows the need for thorough financial checks and planning before selling a business.

This is especially important because 70% to 85% of businesses fail to sell. This can greatly affect an owner’s financial security. So, it’s crucial to be prepared and understand your business’s finances well ahead of time.

Get a Business Valuation Now

If you haven’t had a formal valuation in the last two years, act now. A valuation and industry benchmarking show your business’s true worth. It’s not just about numbers; it’s about positioning your business well in the market. A well-timed exit strategy can greatly impact your wealth and happiness.

Why You Need an Exit Plan

An exit plan is more than a safety net for unexpected events like health issues. It lets you take advantage of good market conditions. This preparation helps you, your family, employees, customers, and community by ensuring a smooth business transition.

Create a Remarkable Legacy

Your business can create a lasting legacy. You deserve an exit strategy that reflects the value you’ve built, ensuring the best outcome for you and your successors.

Start Now

Running a business is busy, but starting this process is crucial. Over 80% of business owners don’t have a written plan, waiting for a less busy time that never comes.

Take the First Step

Begin by learning about your options and understanding your business’s true value. This proactive approach is the key to a successful exit strategy, providing peace of mind and securing your legacy.

Key Insights

Increased Profit Margins & Higher Profitability Businesses that qualify for lender financing usually have higher profit margins. This means they convert revenue into profit better and operate more efficiently. If your business is below industry averages, consider working with a qualified business coach to aim for the top 50% or even top 25%.

Clear and Well-Documented Financials Matter Buyers pay more for businesses with clear financial records, as required for lender financing. Banks can provide loans when records show consistent, clear profits. Meet with your accountant or Fractional CFO to organize your records from the past few years.

Understanding Business Value Owners who sell for the highest prices understand what drives business value. They make strategic improvements to enhance attractiveness. Get a business valuation that explains the elements driving value. Start with a Certified Business Intermediary (CBI), CMAP, or Certified Valuation Analyst from NACVA. Knowing your business’s value helps you focus on increasing it for the best return.

Smooth Operations Successful business owners ensure smooth and efficient operations. This makes their businesses more appealing to buyers and lenders.

Clear Financial Documentation Transparent, accurate financial statements showing profits after normalization are essential. Normalization adjusts financials to reflect true earnings, excluding one-time or unusual expenses. Regularly review your financials, considering normalization. For example, exclude personal car expenses or non-working spouse payments. Meet with a CBI or professional to identify adjustments needed. Check our Normalization articles for more details.

Steps to Take

To maximize your business’s sale value, consider these actions:

Optimize Your Operations Invest time in making sure your business runs efficiently. This boosts profitability and makes your business more appealing to buyers.

Prepare Your Financials Work with financial advisors to create clear, accurate, and normalized financial statements. Transparent records are crucial for lender approval and buyer confidence.

Understand Market Drivers Learn what drives value in your industry and how the market views this value. Make strategic improvements to enhance your business’s position in the market.

Qualify for Financing Aim to qualify for lender financing, like SBA loans. This can significantly increase your business’s value and attractiveness to buyers.

Reach Out for Assistance By focusing on these areas, you can increase the likelihood of a successful and profitable sale. If you need help or have questions, feel free to reach out.

Business Brokers Derived Sold Business Data

Group Number of Transactions Average Sales DE to Sales Sold Price to Sales Sold Price to  DE Average Sold Price
Prequalification 718 $    2,325,642 22.30% 0.638 2.929 $  1,382,562
Prequalification #2 687 $    2,103,116 22.70% 0.645 2.91 $  1,296,748
Non-Prequalified. 689 $    2,109,980 19.10% 0.46 1.942 $     942,885

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