Selling a Business: How the BUYER Sees it.If you’re selling a business, it would be a good idea to look at the business as a buyer will. This is particularly true when doing the valuation for the business. A few weeks ago my post was about risk factors inherent in a business; and all businesses have some. When considering a business’ valuation, those risk factors must be taken into consideration because if the valuation is incorrect and the business is priced above its market value, it will either never sell or the seller will take what they perceive to be a significant haircut – and probably blame the broker. But when valuing and selling a business, it’s important to realize that how the seller views these risks is different from how a buyer does. A buyer buys what they believe is the business’ likely future earnings and the price any buyer is willing to pay for those earnings is based on how risky the buyer believes the projected earnings are. And every buyer has its own required rate of return. If a buyer is willing to pay three times Discretionary Earnings, that buyer expects to get their money back in three years. The more risk the buyer sees in any business, the higher the return they will expect to compensate for that risk, and in turn the faster they will want their money paid back. Therefore, if the buyer perceives substantial risk to the business’ future earnings, the business valuation multiple applied by the buyer might drop from a 3 down to a 2.5 – or even lower. On the other hand, if the risks to the business are extremely low, that multiple might 3.5 or even 4.
Look Through the “Buyer’s Eyes”Business owners regularly minimize or even overlook some of the risks their business may face in the near future. But it is incumbent on business brokers to ask the right questions – questions that are designed to shed enough light on the possible risks that even the business owner will be able to see them.
Our course, “Learn How to Value and SUCCESSFULLY Sell Businesses“, teaches how to value and sell businesses.
Become a Professional Business Broker…Few buyers will be happy with the status quo; they want their work and investment to have the chance to grow the business; to increase revenue and earnings. And to increase value. Smart buyers have a rough exit plan in their mind when they buy. Do they plan to sell in 10 years? If so, they ask themselves if they can grow the business to the size they want during their period of ownership. To answer that question, they ask a bunch of other questions. These other questions are a way to assess risk. The seller is unlikely to look at their business in this way. But a professional business broker must, if the broker wants to be successful in finding a buyer.
Put on Your Buyer’s HatTo properly advise our selling clients, we need to put on a buyer’s hat. We have to look at the business through the buyer’s eyes – which will enable us to help our client see their business how a buyer is likely to. This will go a long way toward arriving at a valuation that will entice one or more qualified buyers. Buyers will almost always ask the basic questions:
- How big is the market for the product or service that the business delivers?
- What’s the potential for growth – for both the business and the market?
- Can the business be scaled?
Where Do Dangers Lurk?Risk comes in many flavors, some of which – regulatory, tax burden (i.e., government-imposed) – cannot be controlled but must still be identified, if possible. But there are many risks that, with a modest amount to consideration on the part of the seller and the broker can be identified and assessed.
We’ve launched a coaching program specifically tailored to Realtors that want to sell businesses and to novice business brokers.
If you’d like to learn more, email me at joe@WorldwideBusinessBlog.com