Valuing a business and pricing it for sale – your mileage may vary

Imagine, you are looking at an impressive, theoretically correct business valuation. No expense spared. Sharp analysis. Using the standard approaches. But this does not mean that the business will sell at the price that matches its value.

Fair market value rarely equals the selling price in the real world

The reason is that the fair market value is an abstract notion. Business appraisal assumes the existence of a hypothetical business buyer and seller that want to enter into a deal. In addition, both parties should possess all the relevant facts about the transaction, and not feel forced to make a decision by circumstances.

Business selling price is negotiable

In the real world, such buyers and sellers rarely exist. Business owners often need to sell the business in order to realize some important goals. Business buyers or investors may be looking to acquire a company that fits their specific needs and is within their budget. Access to outside capital, such as bank loans to finance business sale, may differ markedly in each case. While some business sellers may feel comfortable carrying a note to the buyer, others prefer a clean cut thus limiting the number of qualified buyers.

Most private businesses never sell

This complex mix of personal and market factors is the reason that nine out of ten small businesses put on the market never sell. It’s not that the company is not valuable. The problem is that the business sellers cannot find buyers who are willing and able to close a transaction on acceptable terms. As the saying goes in business selling it’s the terms that make or break a deal.

Price and terms matter

Look at the typical deal structuring calculation and you can see why terms may matter more than the business value. Indeed, such calculations are often used by business brokers and sellers to justify their asking price. In the process, the seller in essence declares who will be considered as a qualified business buyer. It is the party who can afford the down payment, can qualify for the bank loan, is trustworthy enough to be granted seller financing, and can survive on the cash the business can provide.

This is a far cry from the theoretical ‘willing buyer’ that the fair market value standard demands. In any business sale, you are dealing with the real seller and buyer. Each party has specific objectives that may be contradictory in nature. Bringing the parties together to some form of acceptable compromise is the key to a successful business sale.

Price your business for your target buyers

If you are working with a business broker, discussing the price and terms of a business sale is very important as it lets you focus on the target business buyer early on. Your marketing strategy is then to find the largest pool of buyers or investors who are actively searching for your type of business and are capable of meeting your terms both financially and operationally.

One value of a good business broker is to help you identify such qualified buyers and attract their attention to your business. A professionally prepared business appraisal is a must as part of your offering memo. The buyers need to know how you arrived at your asking price and what type of business sale terms you are willing to accept.

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