There are a lot of things that are easier to value and sell than a business. That is because there is a market reference for almost everything that is bought or sold. We usually have a yardstick to make comparisons. For used cars, it is the blue book; for houses it’s comparable sales in the area.
A business is not so easy because it is a unique entity in a highly illiquid marketplace. Unlike real estate brokers, professional business intermediaries cannot broadcast that a particular business is for sale. The marketing process is made almost impossible if the seller has unrealistic expectations. All of the statements below were actually made; the names have been withheld to protect the innocent.
“Listen, I’ve put a lot of blood sweat and tears into this business and deserve to get it back”. (These owners have forgotten that they have been living off the business all the time.)
“My buddy, told me that my business is worth 10 times earnings”. (You can find dozens of formulas for virtually every business, most are nonsense.)
“Look, I need $300,000 out of this to buy another business I’m looking at”. (What?)
“Do you know what I paid for this business?” (Unfortunately, this has nothing to do with what the business is worth today.)
“I need $400,000 to pay off my personal debts”. (Buyers don’t care.)
“Add $100,000 in sales and this is a real winner!” (Why haven’t you done it already? Unrealized potential belongs to the buyer.)
“This business has over $800,000 in equipment and inventory”. (Is there cash flow to support these valuable assets?)
“I want $1,000,000 for it”. (Pick a nice round number and maybe one of those dumb rich guys from the city will buy it”.)
I have intentionally poked some fun at some of the people we have met in the past. The point is, today’s buyers are looking for value regardless of whether they are buying a business or a sweater. Buyers will pay a fair price but are too sophisticated to overpay unless there is synergy created by a strategic acquisition. The value of a business is best determined by a professional review of its assets and earning capacity. In the final analysis, the price that qualified buyers will pay must leave enough cash available to:
cover debt service
earn a reasonable salary
replace assets as they wear out
earn a return on investment
At Business Marketing Services, Inc., we have been evaluating and selling business for years. While we always try to get the best possible price for a business, we are always honest with our clients about the probable price at which their business will sell. If you are interested in selling, just want to know what your business is worth, or have a new quote to add to my list, give me a call.