Monday, August 18, 2008

Sellers being Misled by Brokers!

In the past few months I have been involved with helping a couple of individuals find a fairly priced printing firm for sale. Yes, there are a number of firms on the market, but the problem is most of them are horrendously over-priced.

It is one thing to ask 10-15% more than you think your business is worth, but it's a far different thing to ask 50-100% more than what the business is really worth, and to ask that simply because you don't know any better.

In real estate we at least have "comparables" to use when setting an asking price. In printing, "comparables" are far and few between and are rarely tied to profitability or excess earnings. Instead, many valuation methods simply use a multiplier or percentage of gross of sales to determine a selling price.

Lacking reliable information for valuing their own firm, owner's often turn to business brokers who end up parroting much of what they have heard over the years. All too often, brokers toss out multiples of earnings like 3, or 4 or even 5 but really can't justify or explain how these multipliers have been arrived at or the logic behind them. Heck, in many cases, they can't even come up with a reliable number for "excess earnings."

The end result is an owner who asks $400,000 for a business doing $587,000 because that's what the broker suggested. Unfortunately, the formula used was not realistic, and a more accurate asking price would be in the $290,000-315,000 range.

So along comes a buyer who believes the the business might be worth in the $290,000 to $315,000 range offers slightly less expecting the seller will make a reasonable counter-offer. Unfortunately, when the buyer makes an offer (although very realistic and fair) that is so far below the initial asking price of $400,000 the seller takes it personally, feels insulted, and quickly turns down what in reality is a very fair offer.

The bottom line if you are thinking about selling your business is to examine the business as if you were buying it instead. Don't let a broker or brother-in-law use "pie-in-the-sky" ratios or formulas to set an asking price for your business. If your asking price is truly fair to all involved your business will sell. If the price is far higher than it should be, then be prepared for either the deathly silence that comes with no offers or the implied insults you will suffer when potential buyers offer you far less than you are asking.


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