2 December 2024: Selling a Business:
What’s The Right Price? Pt 2
Selling a business requires knowing what to expect from the buying market…or more accurately, knowing how to price it.
Last week, in Part 1, we discussed the importance of knowing what a business is worth before bring it to market. It should be no surprise to anyone that the most elemental step in establishing a proper price for a business is to know what the approximate market value of that business is.
WHAT WE’RE LOOKING FOR: IT Service Providers: Managed service and cloud service providers. EBITDA: $750,000 to $4 million. U.S., U.K., Canada
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Most businesses don’t sell when they’re first brought to market. And while there are a dozen or more reasons for that, “unrealistic price expectation” – the euphemism for pricing a business far above its worth – is, along with lousy financial records and poor representation, one of the top three. Selling a business is like selling anything else; like cars, houses, boats or legal services, almost any business has a discernible value and not knowing what it is can mean never finding a buyer for the business or leaving money on the table.
When selling a business, not knowing what its market value is, is a major handicap.
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So, we’ll assume that you, gentle reader, are onboard with the need to know what the business is worth. Now, let’s talk about how to approach price.
The Target
We do valuations all the time but others do, as well. When a business owner approaches us about taking a listing engagement, we don’t require that the valuation be done by us but we DO require that a valuation be done and that the valuation company has the credentials that will give us confidence in the number. We want to make sure that the person or company performing the valuation is qualified to do so.
Because there are so many moving parts to any business – to say nothing of the many variables in industry, geography, financing availability and the market in general – any valuation can be no more than an “estimate” of value. Three professional brokers or valuation specialists can each perform a valuation and three different numbers are likely to be the result. But our experience over the past nearly 25 years is that these three numbers are unlikely to vary much – and certainly not materially.
So, the valuation is, presumably, approximately what the business is worth and that number is our target.
The Negotiations
If you’ve ever bought a car, a house, a boat or myriad other physical assets, I would bet that under no circumstances did you offer the asking price for any of them. Business buyers are no different. They will always assume there is room for negotiation. We have to anticipate that any buyers that might be interested enough in the business you’re selling to make an offer will offer something less than the asking price. We have to consider this basic fact when we determine what we’ll bring a business to market for.
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We always advise our clients to add what we refer to as a “negotiation premium” to the value. While it would be great when selling a business to get more than the market suggests it’s worth, our objective is to get no less than the valuation number – our target.
So, what’s the “negotiation premium”? That depends on several factors.
For example, how robust is the demand for businesses in the industry channel? How wide is the “moat” for establishing a competing business rather than buying the one we’re representing? How available is financing for the type of business we’re representing? Is the geographic location conducive to generating sufficient numbers of potential buyers? (I.e., is the business located in a rural area where few people would be interested in living/moving to?)
These are just a handful of examples that will inform how we establish the negotiating premium.
But the most important aspect to consider when contemplating the negotiating premium is this: it must bear a close relationship to value.
For example, if the value of the business is approximately $2 million, don’t add a million – 50% – to the target as the negotiating premium. Buyers are generally pretty smart and a quick glance at the financials will tell a buyer that that business is over-priced.
We generally advise our clients to consider a premium of 10%-15% – possibly even 20%, depending on the unique characteristics of the business – to the target price.
The Bottom Line
Successfully selling a business requires establishing a realistic “price expectation” for the owner. We have to underscore the fact that there are, at any particular moment, many businesses for sale (see the “Silver Tsunami”) and many of these other businesses are the competition.
Buyers look at many businesses before deciding on one to pursue. Pricing reflects value which, in turn, reflects the potential return on the buyer’s investment. They’ll do the math. If we’re not competitive, they’re on to the next one without even giving us the time of day.
When selling a business, the right price requires knowing the approximate value first, and then establishing a “go-to-market” price that bears a reasonable relationship to that value.
I’d like to hear from you. What topics would you like me to cover? How can we tailor these posts to be more useful to you and your business. Let me know in the comments box, below, or email me at
jo*@Wo*******************.com
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If you have any questions or comments on this topic – or any topic related to business – I’d like 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 safe and profitable week.
Joe
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The author is the founder, in 2001, 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
jo*@Wo*******************.com