It’s no surprise – that great valuation is most likely too good to be true. As often occurs with residential real estate, an unprofessional agent will tell a potential seller what the seller wants to hear to get the listing. The agent thinks that, when it gets down to the wire, the seller will lower expectations. The agent is thinking of just getting a listing and will do whatever is needed to accomplish that task as the first step. This misguided approach wastes everyone’s time, is not fair to the seller, and is especially frustrating to the seller who has unrealistic expectations.
The acid test of a business valuation is whether the price of the business allows a buyer to repay a business loan, recover the investment from future profits, and pay a reasonable salary as the new owner, with some profit left over. Many industry sources state that only one business in 10 sells. The main reason for this phenomenon is over-pricing. Another key factor is poor accounting records that do not validate representations of the owner benefit, also known as Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)/Seller Discretionary Cash Flow (SDCF).
As with residential real estate, if no one is coming by to view the property and no offers are being made, most likely, it’s because the property is over-priced.
There are many considerations when establishing a realistic asking price for a going business. One important element to consider is what similar types of business with similar EBITDA/SDCF price ranges have sold for, comparing EBITDA/SDCF to the sale price to establish a multiple of earnings. There are many other factors to be considered, but this is the foundation. This logic is based on the premise that a person will not knowingly pay more for something when a comparable product or service can be purchased in the market. This is why shopping around is important to establishing fair value.
Dealing with straight-talking professionals who can be trusted is always desirable. Dealing with professionals who are good listeners and good at asking the right questions to truly understand the situation is also important.
If you would like a confidential conversation about how to prepare your business to be sold, feel free to contact me at 888-893-6661 or bobd@dolansales.com. My LinkedIn profile is: http://www.linkedin.com/in/dolansales.
© 2015 Dolan Sales, Inc.
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