What Is A Saleable Business?

A saleable business has value above and beyond its liquidation value, and therefore has value as an operating entity. The liquidation value is the tangible value of a business. This includes any cash, accounts receivable, land, and physical equipment. The sale of tangible assets involves auction costs from selling equipment (usually a percentage of what is sold) and collection costs from trying to convert accounts receivable into cash. A business is considered saleable if its value is significantly above its net tangible value.

Intangible Assets of A Business

Intangible assets represent the non-physical assets of a business. This includes a company’s goodwill, brand, name recognition, customer base, employee relationships, leasehold rights, and intellectual property. For accounting purposes, goodwill is the price paid for a business above and beyond the tangible net worth of the business (after its liabilities). From the point of view of most business owners, the potential goodwill received for their business must be significantly above its liquidated value. Otherwise they are better off keeping their business or liquidating the tangible assets.

Saleable Businesses Must Have Significant Goodwill

If the goodwill is not a sufficient sum large enough to motivate a seller to sell their business as an operating and intact entity, then the business is generally not saleable. In this instance, the owner of the business should consider closing at a time of their choosing while auctioning off their equipment and collecting their accounts receivable. Deciphering whether the intangible assets are worth more than a nominal amount may be difficult. Owners of such businesses should consult with a professional business broker, as they are often surprised that their businesses may indeed be saleable.

Is My Business Saleable?

Several factors play a part in determining whether a business is saleable. A professional business broker must determine whether the business could function without the seller, whether the business is active and open, and whether its current fixed expenses (such as rent) are below its normalized revenue. If the business model is such that the fixed expenses exceed the normalized revenue, then the business is probably not saleable.

Business Functions Without Seller

Most business owners are actively involved in running their business on a day to day level. Some are only involved in a part-time way, and some are totally owner-absentee. While the more owner-absentee a business is, the higher its valuation, a business need not be fully nor even partially owner-absentee in order to be saleable. Rather, the business must merely be able to function and realistically operate in the same general way without the seller in order to be saleable. If a business owner is the only employee and all future customer relationships solely depend on the same business owner, then the business is not generally saleable.

Example of Business Functioning Without Seller

Paul is the owner of Paul’s Pool Route, Inc., a local pool cleaning company with a regular maintenance route.
Paul desires to sell his pool route, and is wondering if his business is saleable.
Paul consults with a business broker who decides that the pool route is saleable because the customers of the pool route have a good chance of remaining customers with the buyer after the sale.
The customers of the pool route just want their pool cleaned in a timely and effective way, and will not really mind if Paul personally does not clean their pool.
So long as the pool route is transitioned to the buyer in an orderly and seamless manner (from the customer’s point of view) with no change in pricing or the level of customer service, then there is sufficient goodwill for the business to be saleable.
By contrast, let us assume that Paul’s brother Saul owns and operates Saul’s Handyman Service Inc.
Saul is the sole employee and does not have a regular customer route of any kind.
Saul wishes to sell his business, and is told by a professional business broker that his business is not saleable.
Why? Because without Saul, there is no business.
Unlike Paul’s pool route, Saul has no regular current customer route (which constitutes goodwill) that can be seamlessly transitioned over to a buyer.

Business is Open and Active

In order to be a saleable business, the business must be currently operating and must not be closed. Even if the business was very recently shut down, almost no buyers pay a premium above the tangible net worth of a business that has been shut down. A closed business very rapidly loses any goodwill it may have had because its customers will stigmatize it as a closed or failed business enterprise. Also, employees will be harder to attract as the stability of the business will be in question. Suppliers will deny credit to a closed business. Closed businesses with a ‘customer list’ of past customers may have value to specific industry competitors, but a closed business itself is rarely sold.

Fixed Costs As Percentage of Revenue

A final factor to consider as to whether a business is saleable is determining whether and to what the extent the business is unprofitable. A business that is unprofitable (yet operating) may be saleable as an ‘asset sale’ whereby some premium is paid by the buyer above and beyond the tangible net worth of the business. In an ‘asset sale, some value may be given to intangible assets by virtue of perhaps the number of years the company has been established, the ongoing customer and employee relationships of the company, and the value of the company’s brand and reputation in the community. If, however, the fixed costs (or the costs that do not change with production level of the company’s products or services) of the business is close to or exceeds the revenue of the business, then the business is very unlikely to be saleable.

Occupancy Costs Important Factor

Normally, a long term lease will add value to a business so long as the business is profitable. If the business is breaking even or losing money, then the rent may be too high for the business model to work properly. This is often the case with unprofitable retail-related businesses such as restaurants or beauty salons. Rent is a major fixed cost, and if the rent is too large a percentage of the sales, then it may not make financial sense for the business to exist in its current premises. This generally makes the business generally not saleable.

Many business owners are surprised to learn that their business is indeed saleable. So long as the business is open and may exist after the sale, then it is often worth consulting with a professional business broker.

Give Martin at Five Star Business Brokers of Palm Beach County a call today at 561-827-1181 for a FREE evaluation of your business.