Price and terms are the two most critical factors in the sale of a business. A successful seller is one who sells their business at a fair market value with terms that allow both the seller and buyer to win. Setting the fair market price is critical, and the primary reason we encourage you, the seller, to contract for an independent "valuation" of your business. We stress "independent" because it is simply a fact that most business owners tend to grossly over-estimate the value of their business. Noted Inc. 500 business-owner-and-writer Norm Brodsky recently evaluated 20 members of the current Inc. 500 list, and concluded that “about half reported absurdly high valuations. Most of the others were just extremely high.” He goes on further to describe that most owners take the highest valuation they’ve heard for a similar company and multiply it. Or they simply use some multiple that has become a rule of thumb for their industry. Neither is effective, he states. We agree. Too high a valuation and the business will never sell. Too low, and you leave hard earned-equity on the table - and the buyer may think something's wrong with the company!
Good, quality businesses should have a valuation by an independent organization that establishes the purchase price. This valuation gives all parties involved confidence that a company has verifiable cash flow, and has a value that is set by experienced specialists analyzing both the business and the marketplace, and not just the estimates of the seller, buyer, or broker. It is simply folklore that a "rule of thumb" multiple of sales, etc., provides an adequate valuation. It does not. You would never sell a home without an appraisal; you should not sell your business (that may be worth many times your home value) without a valuation. We strongly encourage all our sellers to obtain a valuation - and don't be surprised if a buyer asks if one has been conducted. When our network markets a business with a proper third-party market valuation analysis, the rate of successful closings is very high. We utilize a ten-dimensional methodology conducted by third-party professional valuators, and the result is not influenced by ourselves or you the seller – it is driven simply by the data we collect from you. And the cost is very nominal. If you're ready to conduct a valuation, or have questions about the process, just drop us a note, or call us at 832-932-2924.
Part of the valuation process includes "recasting" the cash flow of your business. Remember - buyers buy cash flow. It is the single-most important indication of the value of their investment - and a very clear way they decide whether to purchase your company or someone else's! We understand that your bottom line net profit is not a true reflection of the earnings of your business. Your accountant has skillfully and legally compiled your financial statements for the purpose of creating the lowest possible tax liability. However, those statements do not present the picture that a buyer needs to see. There are usually benefits, perks, and salary that you have provided to yourself as the owner. For example, medical and life insurance premiums, personal auto expenses, depreciation, interest expenses, etc. These items, which are provable and verifiable, will add to the value of the business because they are actual cash flow that the new owner will receive - and decide how to spend or invest. Every dollar of provable and verifiable cash flow will add dollars to the purchase price a buyer will be willing to pay.
The second critical factor after price, is the terms of the sale. It is critical for you to be able to understand the impact on the buyer of the terms you set. For instance, an "all cash" sale is naturally the safest scenario for you, the seller. It will also produce the lowest total sale price. Here's why. The cash flow the buyer is buying does not increase regardless of the amount of money they pay upfront. The same amount of cash they would pay to purchase your company at 100% down, could literally be the 20% down that they pay for a much larger company with a greater cash flow. From the buyer's position, it does not leverage their cash on hand very well to pay 100% down. Hence a buyer will look to pay you all cash, but for a significantly lower price on your company - typically forty to sixty percent lower than the fair market valuation. On the other hand, it is not uncommon to sell a business for greater than 100% of the asking price when some sort of terms are offered! That's the result of adding the additional interest you make from financing part of the full purchase price the buyer has agreed to.
The terms you set will determine how much down payment the buyer will make, the assets you will or will not sell as part of the company, and the period and interest rate you will charge for the financing you provide. Every purchase is different, but the terms must be structured in a manner that is a "win" for both the buyer and the seller. It is easy for you the seller to specify terms that make your postion simple with little risk. Unfortunately, that typically makes the buyer's position more complicated or with high risk - and decreases your chances of selling. That's the same lesson for the buyer. You must think of the impact on the other party's position in order to reach terms that will result in a successful purchase.
In all of this you can see clearly how we can assist you. We collect the necessary information, and provide a valuation service. We help set a fair market price that will sell your business. We find, qualify, market, and present to you only buyers that have adequate financial resources. And lastly, we work with you and the buyer in structuring the terms to ensure that you both walk away with a "win." Browse our Businesses Wanted, to get a feel for the level of interest there is in the marketplace, and Contact Us to get your business valuated, listed and sold!
Or perhaps you're not quite ready to sell yet. We're also able to provide consulting services that can help get your company to peak performance in preparation for selling or if you just want to take company performance to the next level. We can provide significant assistance in cost avoidance, cost savings, and revenue growth initiatives, using our proprietary methods such as LEGIST and the business Architectural Maturity Model. Go to Business Consulting for more details.