Putting a Price on a Business
For a business broker or business owner, putting a price on a business versus putting a value on that business are two different things – and each will have a different impact on the price ultimately paid by a buyer when that business sells.
“Value” does not relate solely to discretionary earnings. This is particularly true once we get out of the Main Street Market and into the Middle Market where we’re dealing with businesses sporting revenue numbers in the multi-million dollar range. Investing in areas such as capacity and technology that will provide larger dividends down the road will make a company more attractive – more valuable – to potential buyers and could result in a higher sales price than the number arrived at using a current value approach.
Among the strategies that a broker might suggest be used to get the best possible result when selling is to know the value of the business but not put a price on the business.
Again, I’m referring to the Middle Market here, but let’s examine the difference.
Value versus Price
“Value” is fluid. The business has a current value to the owner but it likely has a different – and future – value to a buyer. As a broker, you want your client to realize the higher of these two values when the deal is done.
“Price” is what a buyer will pay for a business. A seller might originally think that “price” is what he wants but it isn’t. It’s what he gets; that is, what a buyer will pay.
So, how can you best advise your selling client to make sure they realize the highest value when it comes time to sell? Here are several things that will work:
- Plan – Start planning for the sale at least three – and preferably five – years before bringing the business to market.
- Invest rather than “milk” – Continue to invest in the business. Software upgrades, new manufacturing lines, new delivery vehicles, updated website are all places where investment will increase value.
- Numbers – Examine how sales might be increased and expenses reduced. You want to be able to show a trend of increased revenue and decreasing expenses (as a percentage of sales).
- Image – Paint the joint! I’m being slightly facetious here, but making sure that the business’ facilities, equipment, website and every other customer-facing aspect is appealing to look at adds value.
But none of that relates to price, does it?
Arriving at Value
When we take on an assignment to sell a business, the first thing we do is establish the business’ approximate current value. We do so using a number of different metrics and we arrive at a range of values that we then apply different weightings to. This ultimately allows us to arrive at what we refer to as the “most probable” selling price. This exercise provides us and our client, the seller, with what we feel would be the approximate “floor” of the “price”.
But in many instances, it may not be wise to establish an asking price or making that price public. Why?
Because establishing an asking price does nothing but put a ceiling on the value.
By coming to market without a price, we are expecting any buyers to establish what value our client’s business will have for them in the future.
The Business Broker
A business broker or adviser can help establish a starting point for a sale and engage a potential buyer without emotion to get the best price. Professional brokers create a “book” or “Offering Memorandum” for the market that describes the company that’s for sale and allows potential buyers confidential access to additional information.
Our course, The “How-To” of Becoming a Business Broker”, teaches how to value businesses and how to educate the business owner the value of hiring a professional business broker. Learn more…
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Of course, there are those buyers that will make ridiculously low offers, not really expecting to do a deal. But these were never serious buyers in the first place. A serious buyer will spend a fair amount of time analyzing the business and will arrive at value the business represents to them.
This is tantamount to putting the business up for bids and is the best way to find out how the market values the business. It is essentially focusing on tomorrow, not yesterday.
The Bottom Line
Businesses in general are enjoying strong valuations in the acquisition market. Strategic buyers and private equity firms are flush with cash and the number of financial buyers in the market is extremely healthy. There are more buyers now than we’ve seen since before the recession that followed the housing market crash in 2009.
Strategic buyers – a larger company in the seller’s industry, a competitor or a business in a neighboring industry that could benefit by acquiring your client’s business; i.e., those looking to improve their competitive position – as well as financial buyers – those looking solely at financial returns — continue to contact us and scour the market place for suitable businesses. It remains a great time to sell.
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!
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