A seller must understand the importance of pricing their business fairly and arriving at an asking price that can be justified or THE BUSINESS WON’T SELL….. PERIOD!
Sellers are shocked to discover that 4 out of 5 businesses don’t sell….actually there are 66 Reasons Why Businesses Don’t Sell ….it behooves a prospective seller to study the list and eliminate any that apply.
Pricing a business is a complex process, better left to a good Business Broker. Attempting to teach someone how to price a business presents the same challenge as a brain surgeon trying to teach someone how to perform brain surgery on themselves.
How do you price a business so that it will sell?
Pricing a business to sell requires establishing VALUE. There are 2 widely accepted methods of valuating a business to determine a fair asking price
I will briefly cover the 2 methods for determining VALUE .
There are 2 separate components used to price a business in Florida, and they are used in conjunction with each other.
- The first is the owner benefit (OB) or Cash Flow- both mean how much money the business makes.
- The second is a market valuation based on what previous businesses comps in Florida have sold for.
Comps (comparisons) play an important part of pricing many different items for sale in today’s market place. For example, residential homes are compared to other homes sold in the same neighborhoods, to arrive at a fair asking price.
To properly determine OB/Cash Flow, a recast must be performed. The recasted earnings are then multiplied against a earnings multiplier (derived from a database of previously sold businesses – comps) to price the business.
Market Value is based on industry averages as a multiplier using what comparable (comps) businesses in Florida have sold for in the past. The 2 components are used together to create a fair asking price.
In a perfect world, to prove owner benefit (OB) we could just show our tax returns – which are suppose to show how much money the business made. Unfortunately that’s an unrealistic approach because over 80% of all tax returns have to undergo a recast to show the real profits of a business. Remember tax avoidance is good business management, but tax evasion is illegal and will get you put in prison.