The Two Most Common Business Valuation Questions
What can I expect to sell my business for?
This is typically the first question we get from a business owner who is contemplating the sale of his or her business. The simple answers to this question are “There are no simple answers” and “It depends”. In response, business owners may ask “What does it depend on?” Well, we are always glad to answer that question because it is an excellent starting point for developing a better understanding of why seemingly similar businesses may sell for different amounts. By way of example, consider the two following hypothetical companies and their respective circumstances:
|
|
ABC Corp | XYZ Corp |
|---|---|---|
|
Type Of Business |
Manufacturing | Manufacturing |
|
Annual Sales |
$2,000,000 | $2,000,000 |
|
Annual Profits |
$350,000 | $350,000 |
|
Financial Trends |
Flat Sales | Sales Increasing |
|
Recurring Customers |
10 | 50 |
|
Largest Customer |
40% of sales | 4% of sales |
|
Labor Intensive Process |
Yes | No |
|
Off-Shore Competition |
Yes - China | No |
|
Facilities And Equipment |
Poorly Maintained | Clean and Modern |
|
Room for expansion |
No | Yes |
|
Staff |
High Turnover | Stable |
|
Contingencies: Environmental Concerns Pending Litigation |
Yes Yes |
No No |
|
Books and Records |
Messy | Well Maintained |
|
Owner Willing To: Stay On To Help Transition Sign Non-Compete Provide Seller Financing |
No No No |
Yes Yes Yes |
Although these two hypothetical companies have the same annual sales and profits, the more detailed facts and circumstances suggest that these two companies would likely sell for significantly different amounts. In fact, XYZ could sell for twice as much as ABC.
We provide this example to illustrate why “Rules Of Thumb” related to business valuations are typically neither helpful nor meaningful. It takes more than a quick conversion and sharing a few numbers to provide meaningful insights about the value of a business. To learn more about the Most Probable Selling Price (MPSP) of your business, contact your local Sunbelt office.
What should I pay for this business?
Annually, Sunbelt works with tens of thousands of prospective business buyers; most of these people are first-time business buyers with a limited understanding of business valuations. As a result, they understandably have some anxiety about making an offer to buy a business and determining a fair price to pay for a given business.
Sunbelt business intermediaries are trained to walk prospective business buyers through the entire business buying process and assist them with their decision making process. Questions that typically arise when buyers are determining what to offer for a business include the following:
such as receivables and inventory, or are the assets mostly intangible items such as customer lists and goodwill? Can the assets be used as a collateral for the loans used to acquire the business?
- What sort of down payment do I need to buy the business?
- Will I need to personally guarantee any loans I obtain to finance the purchase of the business?
- What cash flow or discretionary earnings can I expect to receive from the business and is it enough to service the debt and provide me with a reasonable salary?
- Is the business’ cash flow stable and predictable?
- What is the composition of the assets being sold? Are the assets tangible, liquid assets
- Can I make part of offer contingent on the future performance of the business?
By educating buyers and familiarizing them with the marketplace, Sunbelt business intermediaries are typically able to assist buyers in answering these and other common questions that arise in the business buying process. To learn more about Sunbelt and the business buying process, we encourage you to contact your local Sunbelt office.