Pricing a Business

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TheRightPriceWhat do sellers want when they sell their business? The best possible price of course (in cash)! The seller wants to be compensated for all their years of hard work developing a strong business. But what is the true value of the business?

The company may have trademarks, patents, and other unique aspects to their business. It may have a well diversified customer base in a growing industry, and have a great management team. The financial statements of the business might be complete and flawless with no seller personal expenses included. The business owner doesn’t have to sell immediately, and the business is hugely profitable. (There are more variables, but this is a start, and this sounds like a terrific business!)

Much like in real estate where the broker takes many variables into consideration to ascertain a value, Business Brokers and M&A Advisors look at many variables to derive a logical market price for a given business. However, variables can change as the process goes on, like seller motivation and revenue trends, so prices can change up or down as well. By the way, a professional third party valuation can be a great tool to determine a price if a seller wants an unbiased review. (See our Blog from April).

Given the above comments, the marketplace allows a seller a certain price for their business – The real value being whatever deal is accepted between a willing buyer and willing seller. Motivation plays a big part in the ultimate price negotiations, as well as supply and demand. By the way, the SBA requires banks to have independent business appraisals performed on business deals over $350,000, so proper pricing is critical.

Just like an overpriced home, a business that is priced too high can languish for a long time on the market and eventually invite negative views as to why it hasn’t sold.

Talk to your Apex Business Advisor to get an honest review of your business and its value.

Due Diligence Time

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acceptedofferWhen is it appropriate for a potential business buyer to ask for details of the seller beyond financial statements and tax returns?

Normally, in the process of buying a business, the buyer will find teaser information on our website or another business-for-sale site and will ask for more information. After initial formalities, such as meeting with an advisor, completing a Confidentiality Agreement, and filling out a personal financial statement, the buyer will have access to some financial history of the business.

If there is interest in the business based on basic knowledge of the business and industry and reviewing the financials, it would be time for the buyer to meet the seller in our office. The buyer will interview the seller and decide if this is still a business to pursue. Next, they meet the seller at the target business (after hours if necessary).

At this point, there is still much to learn. The seller will not generally give customer names, employee names, vendor or supplier names, access to banking information, copies of invoices, or anything else that might be divulging privileged information.

If there is serious interest in the business, but the buyer still wants details, he or she must take the next big step. Making an offer! The offer is contingent upon further due diligence! The sellers will rarely be open to sharing much more information without knowing that they are dealing with a real buyer and not a “tire-kicker” or potential competitor.

Remember, the seller is still trying to operate the business and doesn’t have time to waste. Once there is an accepted offer in place, the seller will be open to the buyer’s due diligence and the extra time and effort this will take from the business (since they are dealing with a real buyer!). If you are interested in buying or selling a business, check out the Apex website.