Business Valuation - Establishing a realistic business market price for your business
Updated: Feb 1, 2020
Establishing a realistic business market price for your business is the most critical first step in selling your business. If it’s too low, then you lose money, and if it’s too high, you won’t sell it, and the business is always at risk when it’s on the market.
It’s well known in the industry that almost 90% of businesses that go to market do not sell and the main reason is Business overvaluation which in turn influences Seller expectation. If you are given a value for your business, then you will refuse lesser offers and hold out for what you perceive as market price. The net result is that the gap between the actual market value and your expectation will lead to an unsuccessful sale.
Some Agents are keen to get instructions and upfront fees, so they hire salespeople to come and value the business for you. At best, they have little experience in selling businesses, or at worst they will overvalue to get the upfront fees. Sometimes, even success fees are lowered in favour of upfront fees, making the deal seem more attractive, but beware, you are paying for something without any guarantee of results. Much better to go to a no sale no fee Business Broker who will be far more motivated to be realistic in establishing the market price and in selling your business.
Experienced Buyers will know their market, and if they are first-time Buyers, then accountants are hired to establish a realistic sale price. Some agents use potential as a factor in market price, but this is rarely taken into account. The business will be judged on its present position and history.
Another important factor in selling a business is how the opportunity is presented to the market. There has to be a clear understanding of who the opportunity will be aimed at, and what that Buyer wants to see to capture interest. The marketing strategy needs to be designed so that the proposal stacks up. Just a glance on the internet business sales ads will reveal that all businesses are marketed pretty much in the same way, without really selling the uniqueness of your business. Also, the information provided has to be designed to attract interest from your target audience. This is because larger agents with hundreds (or sometimes thousands) of listings mostly use a “Macdonalds” type of service, where “one size fits all”
If you speak to experienced business buyers, they will tell you the same:
“the business as advertised was exactly what I found it to be….. the lack of subterfuge is refreshing……"
"I’ve bought a number of businesses over the years and I have a pretty good idea in my sector of what businesses are worth and again it was unusual to find a Vendor of a business who had a realistic or had received realistic advice of what his business was actually worth and that ultimately is what someone is prepared to pay"
"If someone is looking to sell their business I would advise to use a broker that is prepared to accept the kind of terms you offer which is in effect no sale no fee… that’s fairly unusual and my wider experience tends to suggest that a lot of Brokers will inflate price expectations so that Vendors have an unrealistic impression of what their business is maybe worth, so I’d say, if that’s your approach, very good.”
See his full interview after he purchased a business from ETS Corporate business brokers.
“Zach, I've written a google review - one of the things I hadn't mentioned previously is how fairly you priced this business - I've seen asking prices for similar businesses at 7 times EBTIDA which makes it difficult to negotiate as they've set their clients' expectations way too high.
Thanks for all the information - this is by far the best buyers pack I've seen put together and answers a lot of my questions,
I've been looking to buy a business for a while now, but the hardest part has consistently been the lack of information provided by the agent which has made it difficult to make any sort of informed decision, so it is refreshing to have nearly all the information I need when requested! If only everyone else had the same approach, both buying and selling of small businesses would be a million times easier!
If this one doesn't pan out, I will keep my eye out for new business you bring to the market for this exact reason. “
Zach Dogar has over 20 years’ experience as a business broker and has helped hundreds of business owners sell their business.