Understand how the business brokers price their businesses for sale.
by Broker Service Network at www.brokerservicesnetwork.com
GUESS WHAT: "It's what the owner wants" IS NOT a viable explanation from business brokers to how their businesses for sale are priced. Ask the business broker for a detailed explanation of how it was priced. If business brokers decline your request on their businesses for sale THEN GET AWAY! Too many business brokers do not do ANY due diligence in pricing their businesses for sale and most sellers do not have any concept on pricing a business to sell. IN ADDITION, "my accountant told me" is also not a valid reason because an accountant places a hard value on a business NOT a market value as is needed when selling a business.
There are many models used by business brokers in placing a market value on businesses for sale. In some form of the analysis, a cash flow (true profit) and true gross sales figure needs to be determined. If real estate is involved, it should be added in as a separate figure
The following independent pricing models are widely used by business brokers and accepted throughout the industry - it is also easily verified (not including real estate)...
- Cash Flow x Industry Multiplier usually 2 - 4 ( cash flow is the bottom line + all unnecessary expenses added back into the bottom line) depending on industry and growth.
- Cash Flow x 1.5 - 3 + all equipment and inventory (depends on industry & growth)
- 70-80% of gross sales for retail or manufacturing related businesses (depends on cash flow)
- 60-80% of gross sales for food related businesses (depends on cash flow)
- 50-60% of gross sales for service related businesses (depends on cash flow)
If you encounter a detailed and confusing market value formula from business brokers then we suggest stepping back because an old ploy by some business brokers is to complicate a formula to where a buyer gives up and trusts the business broker or seller. If a business broker can't give you the cash flow and gross sales values then move on AND DO NOT tell them how they should price their business (s) because you could be held liable without a valid business broker contract in place.
NOW, if you are given a cash flow figure - ASK the business brokers to show you how the cash flow was determined. Basically take the net profit/loss from financial statements then add to this figure various discretionary expenses. Here is a basic guideline to use...
- Take the net profit/loss
- Add depreciation, amortization and interest
- Add owner's compensation and/or salary
- Add any expenses that were personal in nature (ask them)
- Add any expenses that are not necessary to do business (ask them)
Lastly, ask the business broker or seller for comps on an average of what other similar type of businesses are selling for - including the source where he/she is getting this average. While a seller might not have this, a business broker most certainly should. Knowing the comps will allow you to determine your own basic market value of a certain business or industry.
BSN has certified all business brokers in our network at www.brokerservicesnetwork.com
