Why Does a Seller Need a Broker’s Price Opinion?
Showing Your Business in the Best Light
Imagine you have listed your business for sale, at a price you have decided is acceptable. When a prospective buyer calls, the first thing they want to see is financial information. What will you provide? Your profit and loss statements? Tax returns? If that is all you have then that is what you have to give them.
You and your CPA have been working for years to minimize your tax liability and help you gain as much personal benefit from your business as possible. The P&Ls and tax returns show the worst possible profit picture! Many of your expense accounting entries may actually be benefits to you but your books do not show them that way. Taxable profit is minimized as much as possible.
Is this the best way to showcase your business for sale? With our a market oriented valuation (i.e. a broker’s price opinion) how will you quickly and clearly demonstrate the real cash flows that the operation provides? Doesn’t your tax-oriented approach have the unintended consequence of minimizing your business value?
Would it not be better to send out a multi-year financial report that is recast to show your Discretionary Cash Flows (including all of the benefits that the business provides you)? This is especially critical when you consider that business values and sales prices are typically calculated as multiples of cash flows to give the buyer a market-rate return on investment. Each thousand dollars you can move from Operating Expenses to Discretionary Cash Flow can mean several thousand dollars of sales proceeds to you.
Establishing the Best Market Price
Did you establish your asking price based on providing a buyer with a return on investment commensurate with the risks of the business you are selling? Some businesses carry more risk than others. Accordingly, investors demand and get a higher expected rate of return (i.e. a lower price) for them. Other businesses are lower-risk, and can command higher multiples. Lower risk equals higher valuation.
If you do not look at your business in light of these risk factors you may over-price or under-price your business. Either way, you would hurt your chances of selling quickly at a market price. There are many ways to assess risk factors and related multiples. The proprietary valuation program we employ has 15 such factors, and develops a multiple of cash flows based on the experience of thousands of business sale transactions.
Whether You’re a Seller or a Buyer, Negotiate From a Position of Knowledge and Confidence
Whether you are selling or buying, the same objective approach to valuation applies. It’s a matter of determining a reasonable return on investment for the buyer, one that will allow for normal debt service and some cash flow as the business is being paid off.
What Is A Business Worth?
There is no easy answer to this question. As brokers, we have experience in seeing what businesses actually sell for, and why. Thus we can provide a considered opinion aimed at developing an appropriate valuation to establish the right market price for a seller. On the buyer side, we can show how the price of a business-for-sale offering stacks up against other similar valuations and offerings. We are accustomed to examining the underlying data that supports (or doesn’t support) an asking price and its accompanying valuation methodology.
Depending on the size and type of the business involved, as well as the terms of the sale and the type of buyer, business values vary considerably. They typically range from as low as two times EBITDA (Earnings Before Interest, Taxes, Depreciation, & Amortization), to as high as 9 or even 10 times EBITDA in the case of a strategic buyer with a unique motivation.
Within this range, businesses with more assets (e.g. manufacturing) generally command higher prices than businesses with fewer assets (e.g. service companies.) This is due to the fact that the overall risk is lower with the high-asset company; assets can be sold if the business falls short of expectations. Consequently the value is higher.
This method of establishing a market price or comparing business values is called an “income-based” approach. Doing it properly involves a line-by-line examination of the company’s financial statements. The process is made more complex in those cases where the business expenses include items that are non-essential or non-recurring.
In some cases, the assets of the business are worth more than the cash flow. This situation can occur even with a profitable business when the current fair market value of the assets, if sold, could be invested in a financial instrument and produce a greater return than when invested in the business. This is a complex area, but it’s an important distinction when determining business value.
How We Can Help You
We would be happy to discuss how we arrive at a “broker’s price opinion” and how it can be used in the context of establishing a valuation for the purpose of selling or buying a business. Please be aware of the difference between a broker’s price opinion and a business valuation. A business valuation is typically done by an appraiser, and is suitable for use in legal settings or complex settlements.
We are not appraisers, and we refer to qualified appraisers when appropriate (e.g. where litigation or estate valuation is involved). A broker’s price opinion is market oriented, and is appropriate for someone wishing to have a sense of how buyers would view their business from a value standpoint.
Businesses can be sold with or without real estate, but the principle of market value is similar in each case.
Here is one generally accepted definition of market value, from “The Appraisal of Real Estate, 12th Edition“:
“The most probable price, as of a specified date, in cash, or in terms equivalent to cash, or in other precisely revealed terms, for which the specified property rights should sell after reasonable exposure in a competitive market under all conditions requisite to a fair sale, with the buyer and seller each acting prudently, knowledgeably, and for self-interest, and assuming that neither is under undue duress.” (© 2001, The Appraisal Institute.)
We will be happy to explore whether our broker’s price opinion service might be of value to you. Contact us today at (503) 991-5601 and start the conversation you need.