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The Importance of a
Properly Priced Business: |
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Fair Market Value is the
Key |
Is it important to
properly price a business for sale?
Absolutely! Proper pricing is one
of the most important factors in determining whether a business
will sell or not. Proper pricing accounts for the true economic
performance of the business, which allows the seller to fully
benefit from the sale, while not overpricing the business, which
will ensure that real buyers are able to benefit fairly. Proper
pricing of a business for sale is achieved by working with
professional business brokers and third-party valuation firms.
What is the importance
of a third-party valuation?
It's simple. Buyers are skeptical
about the information that business owners provide. Buyers are
also skeptical of information provided by brokers. This
skepticism is healthy and natural. To help minimize the buyer's
concerns and to reduce the concern about conflicting interests
of brokers, third-party firms have stepped in to provide a more
objective analysis of the business.
How can you properly
price a business for sale?
There are many ways to price a
business. The most appropriate way to price a business is to
employ a justification for purchase price test. This method
provides the buyer and seller an objective standard to determine
the reasonableness of the suggested purchase price. In short,
if the buyer can receive a fair return on investment for the
amount paid as a down payment, then the business is priced
fairly. BBN Affiliate Brokers are trained to help buyers and
sellers understand how the proper price provides a fair return
on investment.
Can I find a third-party
company to price my business?
Business
owners should employ professionals to assist in a
business valuation. No
one knows more about a business than the owner. Similarly, BBN
Affiliate Brokers are trained to assist business owners with
"recasting" the financial statements of the business. This
"recasting" is critical to uncovering hidden expenses that cover
up the true economic performance of the business. BBN Affiliate
Brokers are professionally trained to help owners recast their
financial statements.
Who can help me work
with a third-party company to price my business?
Competent business brokers
ordinarily have professional relationships with third-party
valuation firms. In addition, business brokers often have
certification of continuing education that qualifies them to
help you "recast" your financial statements to find some of the
hidden items that can reflect the true economic performance of a
business. BBN Affiliate Brokers work with valuation firms and
most are certified to help you "recast" your financial
statements.
Does it cost a lot to
have my business valued by a third-party company?
The short answer is no. It is
important to understand that there often are costs that must be
incurred to prepare a business for sale. The number one cost is
a third-party valuation. Many brokers can get preferred pricing
because of good relationships with valuation firms, but the
valuation firms charge brokers for the service. This cost is
passed along to the business owner as a part of the cost of
preparing the business for sale.
While it is impossible to say
exactly how much it will cost any given business, business
owners should be wary of companies that charge tens of thousands
of dollars to value their business. Also, be wary of companies
that rely heavily on projections. Competent brokers know that
buyers buy on the historical performance, not what might happen
in the future.
What is the difference
between "Book Value" and "Fair Market Value" of a business?
The "Book Value" of a business is an
accounting view of the value of the assets of the business.
"Book Value" is not an accurate economic perspective. It
considers arbitrary deductions from the value of items owned in
the business. Therefore, "Book Value" only considers the skewed
accounting view of the value of the assets and does not consider
the income that the assets generate.
The "Fair Market Value" considers
the true economic value of the assets. There are a number of
ways to arrive at the true economic value and most professionals
employ several techniques. "Fair Market Value" also considers
the fact that some assets generate income for the business.
Therefore, "Fair Market Value" is what buyers consider, what
banks lend on and what sellers can expect to be paid for.
Why is financing an
important part of the sale of most businesses?
Whether a Commercial Lender, i.e.
bank, or Seller Financing, i.e. the owner finances the sale, a
portion of the sales price of virtually all businesses is
financed. There is a simple reason for this. Buyers want to
invest the money they have wisely. If they can leverage their
cash and finance a portion of the sales price, the Buyer will be
able to acquire a bigger business with more cash flow. So,
Sellers should understand that Buyers want to optimize their
investment and financing permits that to happen.
What documents do banks
want to "pre-approve" a business for a loan for sale?
Most banks look for three years
worth of financial statements and business tax returns, as well
as interim financial statements, and a third-party valuation.
BBN.Affiliates.assist business owners in obtaining third-party
valuations.
What documents do banks
want to "pre-qualify" a buyer for a loan to buy a business?
Most banks ask for three years worth
of personal tax returns, personal financial statements, and a
resume of the buyer in addition to a third-party valuation of
the prospective business for acquisition.
Conducting a
business valuation is the first step in the sale of your
business.
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