How Do We Determine the Right Price for a Business?
Last week’s post generated enough comments to warrant a separate post to address them. The questions all boiled down to “How do I get the right price for my business?” and recalls an earlier post entitled “The Price is Right…Or Is It?”
Selling a business – especially one that you started, nurtured and grew – is fraught with anxiety. Some of that anxiety stems from fear – about the future, about your identity, about the process, about the money.
Fear about your identity comes from the prospect of letting go of what you’ve built and handing the reins over to someone else. I’ve written about that before and one of the examples that I used was my own experience.
Fear about the future is normal. Unless you’re about to buy another business, you’re concerned about having enough money to live the lifestyle you want for the rest of your life and perhaps be able to leave something for your children. (If the kids are your concern, you might want to read this post.)
Fear about the money is related to fear of the future, but what I mean here is fear of letting your business go too cheaply and leaving money on the table – or putting too high a price on the business and it never selling.
Fear of the process is completely understandable. But as I’ve written previously, like surgery, if you put the “process” in the hands of a pro, it becomes much less frightening.
But the questions we received mostly related to getting “the right price” and this relates to fear of the future and fear about money. The biggest concerns are financial. So, what is the “right price”?
Where to Start
There are two questions in that question; and two answers.
The first question is “what is the right price for my future?” The second is “what is the right price for my business?”
The first question relates to what your plans are and how much money you’ll need to realize those plans. If you’ve been taking $350,000 annually out of the business in wages, dividends and benefits, and living a $350,000-a-year lifestyle, do you plan to continue living that lifestyle post-closing? If so, you’ll need to deploy the sales proceeds and any other assets you have so that they generate that amount of income.
Do you intend to fund your grandchildren’s education with some of the proceeds? Do you plan to buy a winery and stomp some grapes like this classic? Do you want to buy a bed and breakfast in Vermont or small inn in Spain? What’s the plan?
As I’ve written before, sipping Scotch on the porch and competing with The Big Dog for the America’s cup are two entirely different ways of living requiring entirely different bank balances. Once a post-closing life plan is developed, business owners need to know whether the proceeds of the sale of the owners’ business will be sufficient for them to continue the lifestyle to which they’ve become accustomed – or at least the one they’re planning.
If you’re a business broker, in many cases the sellers will not have any idea what they want to do and therefore how much money they’ll need. This is a BIG hole in the planning/selling process and can be a source of significant and growing concern for the sellers as a deal gets closer and closer to closing. It is not uncommon for a deal to tank because, at the 11th hour, the sellers realize that the business’ value and the deal structure are not going to give the them the resources needed to live the post-sale life they want.
But this is one of the most important aspects of business brokering; helping your clients prepare not only for the sale, but also for after the sale. You’ve got to help walk them through what life will be like once they no longer own the business you’ve been engaged to sell. Ask questions; make suggestions; get them thinking.
Become a professional business broker and help these sellers out!
What other assets do the sellers have? Discuss their tax position and the various ways that capital gains taxes can be reduced. Discuss how the proceeds of the sale can be managed. Discuss the existence of third-party intermediaries and how the use of such intermediaries can significantly reduce the tax impact of a sale. All of these issues – and more – will need to be addressed to get to the right sale figure. If they haven’t already been engaged, get the seller’s accountant and financial planner involved.
There are a lot of moving parts to consider when planning the sale of a Mid-Market business and as a professional business broker, you need to be aware of them and in a position to suggest ways that your clients will reap the highest reward for their years of work. This process helps reconcile the seller’s understanding of their long-term financial needs with the answer to Question #2 – or not.
What’s the Business Worth?
Which leads us to the second question: “What is the right price for my business?” This one is relatively easy. The short answer is to hire somebody with the correct credentials to determine what a business is worth and find out.
Getting an accurate business valuation is critical to the decision-making process. Even after going through the process of determining what the sellers will need in Question #1, without a valuation there’s no way to tell if the business sale will provide for those needs.
The Bottom Line
Selling a business is rife with pitfalls – both emotional and financial. Ultimately, the key to a successful deal is knowing the financial figure that will let the business owners live the lifestyle they want to have after the sale – everything else follows from there. Successfully pulling this off requires planning; specifically, developing an exit strategy that details among other things capital needs, timing, ongoing management and the talent needed to reach the sellers’ objectives.
If you’re a business owner, you can’t start this plan too early, as this little tale will illustrate. So, we’ve put together a quick five-step exit strategy outline that’s available free simply by telling me where to send it.
If you have any questions, comments or feedback on this topic – or any topic related to business – I want to hear from you. Put them in the Comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a profitable week!
#business #howto #sellabusiness #becomeabusinessbroker #businessbrokering #businessvaluation