Business Brokers: Discount for Lack of Marketability
Business brokers – and business owners: Would a discount for lack of marketability by appropriate for a business you’re considering bringing to market?
If you’re a business broker – or intend to become one – you’re going to encounter businesses that will require you to consider applying a discount for lack of marketability.
I hear some of you asking, “A discount to what?”
A discount to the value you arrived at when you did your valuation.
An analogy that might be a good example is a 20-acre piece of commercial real estate that, years ago, was the site of a chemical plant. The site is now cleared, has highway frontage, great visibility and 80,000 vehicles pass by every day.
Diagonally across the highway, a 15-acre site just sold for $200,000 per acre and the developers plan a luxury apartment project.
There is no decent shopping within 10 miles of the apartment site and the firm representing the nearby former chemical parcel thinks that the site would be ideal for an outlet mall or upscale shopping center and believes that, under normal circumstances, it would be worth about $250,000 per acre.
But the fact that the site was originally a chemical manufacturing plant will impact its marketability and the real estate firm has to account for that. It does so by applying a discount to the “normal circumstances” value of $250,000 per acre.
The same concept is applicable to a business.
If there are factors – existing or anticipated – that might limit a business’ marketability, those factors will likely impact that business’ value. Therefore, if your analysis of the business’ performance over the past five years suggests a Most Probable Selling Price (“MPSP”) of $4.7 million in a normal market, you have to consider the factors that might impact that value and apply some discount to your MPSP to reflect those factors.
What is Marketability?
The “marketability” of a business relates to how appealing it is to the buying public. But marketability goes beyond the simple calculation of how much money it generates for the owners. Marketability includes geographic location, product or service offered by the business, political and environmental considerations, and dozens of other issues that might negatively impact how the buying market will look at the business – and possibly reducing the size of that buying market for that business.
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Our course, The Basic “How-To” of Becoming a Business Broker”, teaches how to market and sell businesses.
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Discount for Lack of Marketability for a Business

Geography
One of our offices serves a rural area. One of the brokers there was contacted by the owners of a specialty wholesaler about selling.
Changing Conditions
In a similar vein, political conditions that impact the business might change abruptly impacting the business and its value. Over the past few decades, there has been an ebb and flow of political pressure on firearms manufacturers, most of which are
Product or Service
This example may be a little distasteful for some but it illustrates several factors from changing conditions to pride of ownership.
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Our course, The Basic “How-To” of Becoming a Business Broker”, teaches how to become a professional business broker.
Become a Professional Business Broker…
When you value a business, one of the considerations is risk – and, if you want to sell that business, valuing for risk is is part of determining the need to discount for lack of marketability. These are just a few examples of instances where a discount for lack of marketability would apply.
Remember, your job is to get the client’s business sold. Discussing the buying market with the owners of the business – for any business – is what has to be done early on. This means not only the condition of the overall market and the availability of financing, but also any aspects specific to the business – or industry – that can reasonably impact its marketability.
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!
Joe

The author is the founder of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) of which there are fewer than 600 in the world. He can be reached at joe@WorldwideBusinessBlog.com