Whether you are buying or selling a private business, establishing its market value is critical to a successful transaction. Depending on which side of the transaction you are, you may need business valuation for these reasons:
- Determine a reasonable selling price
- Support your asking price
- Screen businesses for sale to select promising acquisition targets
- As a reality check in a business acquisition negotiation
Finding the right business selling price
In the minds of business owners, the best selling price is what meets their personal or business goals. It may be a retirement package or cash needed to get into a new venture.
The point to remember is the actual value of a business has nothing to do with the owners’ goals. It is an economic concept that rests on the business financial and operational outlook. Even historic performance is of little value except as a guide for estimation of the business future prospects.
If your business valuation disappoints, there is work to be done before the business goes on the market. You would need to review the key business value drivers and see what you can do to increase the valuation in order to meet your exit strategy objectives.
Increasing business earnings, putting a professional management team in place, or reducing key customer concentration can all go a long way toward increasing your business worth as well as making the company a more desirable acquisition target.
Is the asking price right?
No other piece of the business for sale puzzle causes more contention than the asking price. Sellers want the highest price possible, while buyers look to get the business on the cheap.
In a business sale, a reasonable price and terms will make or break a deal. A solid business valuation is your ticket to getting the negotiation off on the right foot. A business selling price that is backed by careful analysis is far more likely to lead to a successful deal.
Screening business for sale targets
One way to avoid the frustration of endless haggling is to screen business for sale listings. Doing this quickly and efficiently is the sure way to avoid fruitless debates with the sellers who refuse to budge. You can run quick valuation calculations, comparing the target companies to the actual selling prices, or estimating the multiple of discretionary earnings the seller expects.
If the target looks overpriced, consider moving on to more attractive opportunities.
Price justification – the reality check of business selling price
If you ever saw a business offering memo prepared by a good business broker, the suggested price and terms are usually included. The question is whether the deal matches the needs of both the buyer and the seller.
Such deal checks are important as they let both parties know what terms are acceptable. Regardless of the business valuation result, a business sale must address the needs of the actual buyer and seller. No two buyers have the same expectation of return on their investment, the same skill set or ability to recruit key employees. In addition, financial strength of the buyer can make a lot of difference as to the amount of down payment or ability to raise a loan to fund the business sale.