- Many business owners have no idea how much their business is really worth with many overpricing it.
- Your profit trend and growth multiple are two critical factors in your pricing.
- Good business will always sell, and a good business broker can help you sell well.
Sometimes, it may seem like the value of your business is one of the world’s biggest kept secret (and to some extent this is true!).
Business owners can spend much of their business life – in many cases, a long time – not knowing the real value of their business from a saleability point of view until when they need to, and sometimes this can be a rude late awakening.
By real value, I don’t mean “book value”, but rather how much would somebody be prepared to pay for it. The danger with this is where future decisions being considered, and even made, based on unrealistic expectations.
Often, the business owner has an overly optimistic value of the business due to anecdotal and inaccurate information they have heard from colleagues, acquaintances and, sometimes, even their accountants. Most have not received this firsthand, but from somebody who has heard of someone who has sold a business, which is more an opinion than a fact.
Another way that business owners attempt to guess the value of their business is by looking for businesses advertised on the Internet, searching for those of a similar size and industry to compare them with their own.
There are two reasons why this method can’t give you a good indication of your business value. The first is that no two businesses alike. They all rely differently on their owners, have different customers and different risks associated with them, so the comparison is not like for like. The second reason is that businesses often sell for a price (together with terms and conditions) that’s quite different to the one being advertised, or they don’t actually sell at all.
How to find out the true value of your business
One way is to detach yourself emotionally from the business, and then ask yourself the following question: “Knowing what I know now about my business including its profits, advantages and disadvantages, and then comparing it to other businesses and investment opportunities that I could invest my money in, how much would I pay for it?”.
If you answer this question without any emotional attachment and honestly, this somewhat reveals the true worth of your business.
Secondly, the asking price of a business is a snapshot in time. If the business is worth X dollars today, there’s no guarantee that the same price will apply in 12 months or even 6 months from now. Just look what happened during the global financial crisis.
If you’re looking to maximise your profits, selling a business can take time. Therefore, to be able to make sure genuine and appropriate buyers are attracted from the start, the business needs to be in good shape and remain that way throughout the sale process. In fact, if growth can also be facilitated, even better.
Failing to address this from the outset means the process could blow out to years and result in you receiving less than the current market price, let alone what you wanted in the first place.
How does this happen?
Once the business goes live to the market, the first few weeks of selling your business are critical. Most buyers are monitoring the market and waiting for suitable businesses to become available.
Your best buyers are the ones that show interest as soon as the business is made public. They are seeking to invest in businesses with sustainable income, definable risks and good returns.
Or they could be speculative buyers looking for a bargain, seeking for growth by acquisition or more conservative buyers looking for a secure investment. They will have their own advisors and are unlikely to pay more than what they perceive to be the market value of the business. In fact, sometimes, they’re aiming for below market value.
If you overprice your business, you will first attract buyers who are looking at larger scale businesses. They will not usually see value in your smaller business. At the same time, you will not attract buyers who can afford the true value of your business because of the high advertised price.
Inevitably, the business stays on the market longer than it should have, with little interest being generated. In time, the price is dropped to the truer value of the business. Now buyers who can afford it will notice the price reduction but may perceive it to be flawed because it has been on the market for a long time. This may in turn put them off buying it.
With no alternative, you may drop the price to less than market value to encourage interest (assuming you still need/want to sell it). The business can now be snapped up by bargain hunters.
Clearly not the outcome you were hoping for!
When your business is appraised, which could be at the start of your sale process, but the indicative price is nowhere near what you want, then you can do something to remedy it. However, you need to have time on your side.
Essentially, there are only two levers that are available to price a business; the profit and the multiple. The profitability is what it is, with some adjustments that can be made depending on the conduct of the business, based on the annual reported financials provided by your accountant. The multiple is where more of the intangible considerations sit i.e. trends, industry, size, age, online/offline, and reliance on the owner.
Taking these into account, you can apply the formula of “profit x multiple = price”. Seems easy, right? Where an experienced business broker can really make a solid, professional difference here is knowing which profit and which multiple to use. This is one item that cannot be googled if you need more specific answer pertaining to comparable sales of other businesses in your industry.
Why? Because the details of what happened with a business sale is not and cannot be made public. Confidentiality is often key in these circumstances. Regardless of the price a business is listed for, this is not typically what the final number is.
And as it stands today, there are still not enough “good” businesses to meet the ever-increasing demand from buyers. As seasoned business brokers, our growing database of prospective buyers will attest to this.
The current trends suggest that sellers have been reluctant to put their businesses on the market because appraisals have dropped. Appraisals, based primarily on trading profits, were strongly affected in the aftermath of the global recession in the 2008-09, and unfortunately, 10 years on, many have not bounced back.
This directly resulted in potential sellers being forced to hold on to their business as they wait for profits to improve. Appraisals under these circumstances (though certainly not incorrect) are often less than what you may be looking for.
As in a classic supply and demand scenario, well-performing businesses need not take that path. The growing number of buyers in the market opens the door for businesses that have performed solidly.
Good businesses sell and they sell well
With proper preparation a good business will sell and sell in a reasonable timeframe. And the asking price will make sense to the market, with a buyer willing to seriously consider what is on the table.
The past 12 months have been good for clients of our firm with the sale of several businesses occurring within a matter of weeks from being placed on the market. Good brokers everywhere will tell you similar stories, but the one common theme sung over and over again is that these businesses were priced correctly and adequately prepared for sale.
The sellers knew what they were selling, and the buyers knew what they were buying. When it comes down to it, if you have a strongly performing business, priced realistically and with the right preparation, you will find a buyer, and you will find them fast. The shortage of good businesses on the market assures it.
When selling your business, you need to demonstrate the value of it to a potential purchaser and price it accordingly. “Demonstrate” being the key word here. What you think the business owes you and what the financials support can be two different things.
If the profit and loss statements cannot show a reasonable profitability over a consistent period, and therefore reassuring rate of return, then the prospective buyer will either walk away or come back with a low and sometimes considered insulting offer. Thus, highlighting the importance of the profitability of the business having to support the asking price.
By considering all these factors, matching the story with the numbers with your expectation makes for a far more likely favourable outcome, meaning you have been able to attract the right buyer at the right time and receive the true value of your business as at this point in time. By default, you will have also cracked the mystery of how much is your business worth.
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