I run a small specialty coffee roastery with a steady local customer base and some wholesale accounts. After eight years, I'm thinking about selling, but I have no idea how to set a fair price. I don't want to scare off buyers with an inflated number, but I also don't want to leave money on the table. What factors should I be looking at? I've heard everything from a multiple of revenue to a multiple of profit, and I'm not sure which applies to a business like mine.
Business Valuation
How to price your business fairly without undercutting yourself
What's your annual net profit? That's the starting point. Revenue multiples are common for businesses with recurring revenue or high growth, but a roastery is more of a traditional small business. Most buyers will look at SDE (seller's discretionary earnings) and apply a multiple based on your industry and size.
Don't forget to add back your own salary and any personal expenses that run through the business. That's the whole pont of SDE. Also, your equipment has value. A roaster isn't cheap, and buyers will want to know the age and condition of everything.
How much of your revenue comes from wholesale versus retail? Wholesale contracts can be a double-edged sword. They look good on paper but if they're not locked in, buyers will discount them heavily or exclude them from the valuation.
To build on that, you'll want to have clean financials for at least three years. Buyers will want to see trends, not just a single good year. If your books are a mess, expect a lower offer or no offer at all.
Fair price is whatever a buyer will pay and you'll accept. Get a professional valuation if you're serious. It costs money but it gives you a defensible number and helps you negotiate.
I sold my bakery last year. I used a business broker and it was worth the commission. They knew what buyers were looking for and helped me present the numbers in a way that made sense. I probably would have underpriced it on my own.
Watch out for buyers who try to value your business based only on assets. That's a liquidation mindset. If you have a loyal customer base and a good reputation, that goodwill has value, even if it's hard to quantify.
One more thing: don't wait until you're burned out to sell. If you're desperate to get out, buyers will sense it and lowball you. Start the process while you still have energy to negotiate.
Also consider staying on for a transition period. Some buyers will pay more if you agree to help for a few months. It reduces their risk and makes the business more valuable in their eyes
I appreciate the input. I hadn't thought about the wholesale piece in that way, or the transition period. My books are are decent, but not perfect. I'll start by pulling together three years of profit and loss statements and separating out my personal expenses. The equipment list is going to take some work too.
Good luck. Just remember that the first offer is rarely the final one. Have a number in mind that you won't go below, and be ready to walk away if it doesn't feel right.