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How Do Buyers Determine Value when Considering a Business Purchase?
Contributed by Sunbelt Business Brokers
Business owners often tell us that they want $X.XX for their business
or that their [fill in someone's name] told them that a business is
worth X times [fill in your favorite term here - earnings, revenue,
EBITDA, cash flow, days of the week, etc]
The reality is that Sellers never determine what the value is,
unless they ask too little for their company. Selling a
business is all about the buyer. Without an accepted offer
there is no sale. Buyers determine value in two ways,
one is in terms of price and the other is in terms of fit.
Frequently, potential buyers of a business will ask me how
the seller chose their asking price. While this provides
some academic interest to the buyer, it doesn't really help
them in their decision-making. A better question for the buyer
to ask (of themselves and their advisors) is: "What is this business
worth to me?"
We all know that buyers and sellers certainly start out with
different opinions of 'value'. If they can end at
the same place - we can do a deal. What buyers need
to establish is what a given business is worth to them.
Amongst multiple buyers assessing the same opportunity,
several versions of the 'right' value will appear.
Here are some key questions for business Sellers to answer, from a Buyer's
perspective, as they put a price on, and package their business for sale:
(Consider that the Buyer will be asking himself/herself
these questions about your business) ...
- From the cash flow of the business can I pay myself a wage that
is reasonable for this industry?
- After my wage, can I service the debt I need to take on to
purchase this business?
- How has it performed financially in the past?
- How much risk is there that it will perform as well in the future?
How about better?
- Am I comfortable that I have considered my working capital
(operating funds) requirements in my value of this business;
either as included in the price, or necessary for me to have
available after a purchase?
- How much does this business (and the job that goes with it) interest me?
- Do I bring skills to this business that will make it perform better
for me than for the previous owner, or potentially for other buyers?
If I do, does this increase my perception of value, or is it just
another checkmark in continuing my evaluation?
- Does this business offer me the kind of future I see for me and
my family; financially, and personally?
- Will I want to get up every morning and go to work at this company?
The first five questions are related to the price and determination
of value, the last four questions are about whether the business
'fits' the Buyer.
Every buyer is different; and each will have different
reasons for purchasing a business, and a different basis
upon which they determine the 'value' to them. Buying a
business, like it or not, is a process of learning, studying, and
negotiating. Price, training, inclusions, terms and
conditions, and seller notes are just a few of the items that
buyers and sellers need to consider and be prepared to negotiate.
Do you really want to sell your business? Make sure you have a
reasonable answer to the first five questions, to set your price
expectations. Make sure you present and prepare your business
to show buyers the positive side of the last four questions.
Remember, your business is not for everyone. You need to turn
away all people that it doesn't fit - even if they have the skills
and financial resources. If the business doesn't fit - at the
end of the day, they won't buy it!
Download a .pdf copy of this article.
WANT TO LEARN MORE: The London, Ontario office of Sunbelt
Business Brokers offers a free program called "Buyer 101". In that 2 hour seminar, we discuss only 4
key issues that are critical to a potential business Buyer - Importance
of Confidentiality; How to Determine Value; Financing a Purchase, and;
the Offer and Due Diligence process. These same elements are
critical to - and are the same for - business Sellers! Please
Email us or call: 519-473-2227 to register for the next course!
Erik Twohig, CMSBB President, Sunbelt Business Brokers of London
Sales Representative, Sunbelt Business Brokers Premium
134-4474 Blakie Road, London, ON, N6L 1G7
T: 519-473-2227 x 22 C: 519-670-9214
E: erik.twohig@sunbeltnetwork.com
Web: www.sunbeltlondon.com
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