Tuesday, 16 April 2013
Buyers and Sellers Usually Have a Different View of Value
Most business owners think their business should be priced more than it’s worth – mainly because of all of their hard work over the years.
What they need to realize is there are certain economics and realities that dictate the price.
Besides the various methods of business valuation, the cash flow ultimately must provide the new owner a return on cash investment, ability to service debt and a reasonable salary for the owner and/or manager.
One of the most effective methods of getting to this number is the “cash flow” method, which takes the business’s net profit and combines it with the owner’s salary and personal perks. Plus interest and depreciation. Buyers are typically comfortable with this method because when they are buying a business, what they are really buying is its cash flow.
What can be a challenge is to agree on a multiplier that both the buyer and the seller are comfortable with. To illustrate, consider a recent business deal where the seller was marketing his advertising business that was cash flowing $300,000 for $750,000 which represents a 2.5 multiple of cash flow. The Buyer was prepared to pay a 2.2 multiple for cash flows which would result in a sale price of $660,000. You can see a small variation in multiple can have a dramatic effect on value.
What is common is neither side is necessarily incorrect in their analysis. The seller appropriately considered their diversified customer base, key personnel, market share and longevity in the market place. The buyer correctly reviewed the level of cash invested and rate of return on alternative investment choices, the cost associated with the transition and the type of industry.
In this case there are many ways to bridge the gap, however, too many business owners find major disappointment because the marketplace has not accepted their asking price. They must remember the value of their business is what a buyer is willing to pay and they are willing to accept.
Do you have a small business question you would like answered about this article or other
Bill Sivell is a Business Broker with VR Windsor Inc., which sells businesses to buyers across Canada and around the world. His 14-year career includes diverse senior management positions in marketing, advertising, sales management and operations management. He blogs about selling businesses at Maxbizvalue.blogspot.ca