This article are provided for information purposes only, and are not intended as legal advice.


How do you determine the selling price of your business?

February 2nd, 2010

You have made a decision to sell your business but you have not determined the asking price of your business.  You have hired an accountant or business broker who determines what they believe to be the fair market value of your business.  You know that you never get the asking price of the business.  If you want to get as close as possible to the fair market value determined by the business broker, what should your asking price of the business be?

 

If your asking price is too high, people will not look at your business.  Remember, when you are trying to sell your business, it takes on average 6 to 12 months to sell the business and close the transaction.  Some happen quicker but this is an average time table.  When a buyer is looking for a business, even though I tell them it takes on average 12 months to find and close your first transaction, many people laugh and do not take the length of time seriously.  After 12 months, they come back and say my time table was not unrealistic and they were almost 12 months to the day to close their first transaction. 

 

Even though it takes buyers a long time to find the right business, they are impatient and want to buy a business today, not tomorrow but today. As a result they will look at a summary of many businesses.  If the price is too high, they will not look further into the business, they will move on to the next business.  Many business owners believe that their business is worth more than it really is. 

 

A small retail printing company was looking to sell their business. They had no profits yet they thought their business was worth $300,000.  They tried to sell the business to every competitor, they tried to sell the business to private investors.  They did not use a business broker in the sale of their business.  They could not understand why they did not receive any interest for the business.  Firstly, it was not profitable and everyone forgets there is an opportunity cost.  The owners believed that they had equipment worth $200,000 and the goodwill was worth $100,000.    If no competitor wanted the equipment, that meant that there must be a lot of capacity in the industry and a lot of surplus equipment.  I am guessing that similar equipment could be bought for a fraction of the purchase price. Remember, it does not matter what you paid for the equipment, if technology changed or their is surplus equipment on the market, it may be worth only a fraction of what you paid.  Goodwill for a company which is not making any profits and has not reached critical mass/profitability may have been overstated.  Since everyone knew the price was overstated, no one was interested.  If the owner dropped the price, would anyone come back for a second look?

 

When you are looking for a house, a buyer will look at a certain area, then look at the houses within the subdivision.  If a house is over priced, they may wait until the seller reduces the purchase price because they know that all houses in the neighbourhood sell for less.  As I have indicated in prior blogs, every business is unique.  The sales and profitability of every business is different therefore there are no two identical businesses selling for the same price unless they have exactly the same profit and assets.  That is very unlikely.  As a result, a buyer will not wait to see if you drop the purchase price of the business.  They will look at other opportunities.  In my printer example above, the owner thought that a buyer was getting a great deal.  Since there were no buyers, the investors did not agree.  But he was forgetting, what could the investor buy for $300,000?  If the buyer could find another business with profits of $100,000 why would he pay the same amount for a business breaking even or losing money?

 

For the right price there is always a buyer of a business.  It may take a while to find the person but there will be a buyer.  Many buyers do not know what they are looking for when they want to buy a business.  They have a budget and they know what they don’t want to buy.  Many buyers do not say I need to buy a printer.  they may say, I want a retail business.  As a result, you need to set your asking price close to market so that buyers will not bypass your investment opportunity to look at other businesses which may be for sale in your industry cateogry or a totally different business which is more profitable and has a lower asking price.


Filed under: Selling a business — Gary Landa @ 9:58 am


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