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How Do Buyers
Determine the Value
of a Business ?

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• 8. Some Hints for you When Selling your Business.  
 
• 9. How to Respond to Buyer Inquiries .  
 
• 10. Qualifying Buyers: Separating the sharks from the keepers.  
 
• 11. Ten things I should know when negotiating !  
 
• 12. Will I Get Top Dollar When I Sell My Business ?  
 
• 13. Prepare your Business for your Ultimate Customer.  
 
• 14. Is Your Business a Pain, or a Pleasure ?  
 
• 15. What Drives Owners to Sell & Buyers to Buy ?  
 
• 16. Frequently Asked Questions - by Jim Clark  
 
• 17. An Overview of the Business Selling Process.  
 
• 18. Recasting - a key to building value to the seller.  
 
• 19. What the Profit & Loss Statement Doesn't Tell You.  
 
• 20. How Do Buyers Determine Value when Considering a Business Purchase ?  
 
• 21. Why does Confidentiality Matter when Buying or Selling a Business ?  
 
• 22. Should You Buy an Existing Franchise?  5 Questions to Ask  
 
• 23. Succession Planning is central to selling success  
 

 
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These articles are for general information purposes only and do not constitute legal, accounting or other professional advice.  Important financial and legal decisions should be made only after seeking appropriate professional advice based on your specific situation.


How Do Buyers Determine Value when Considering a Business Purchase?

Contributed by Sunbelt Business Brokers

Contact: Erik Twohig, Sales Representative,
    erik.twohig@sunbeltnetwork.com

 
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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