Sitting in the Buyer's Chair
Many of the business valuations that I prepare for owners come in much lower than what they were expecting.
I am always curious as to why so many of them think their business is worth so much more? Many appear to have pulled numbers out of the air. Others end-up mis-applying what otherwise are sound valuation formulas. Still others simply forget that all of the liabilities on the balance sheet need to be cleaned up or eliminated in order for the business to be sold "free and clear."
If you are expecting the buyer to assume all of those notes and other liabilities you are mistaken. Too many owners think selling their business at their price should be simple. They expect that someone else will take over all of their headaches and that in the end they will be able to walk away with a fistful of cash. That's just not going to happen.
Imagine sitting across the desk from a seller and trying to decide whether this purchase is a wise one or not. The buyer is ready to commit what $250,000, $400,000 or some other amount. In the simplest of terms, he expects that this investment should produce some type of return on his investment, just as he would if he invested in the equity market.
By the way, if the buyer is buying the business as an on-going entity, then the equipment you are selling has to be sold free and clear. Remember, you can't sell what you don't own.
If the buyer is going to takeover the functions of a working owner, he (or she) also expects that the business should be able to pay themselves a fair market salary for managing the business on a daily basis, as well as generate enough excess money to pay the seller each month.
Can you explain to a potential buyer how this can be done? Can you justify your asking price based upon the above scenarios?
P.S. I have only known of two businesses that have sold for more than one year's worth of gross sales. Most businesses end up selling for somewhere between 25-60% of gross sales. Some valuations are higher and many more tend to be at the lower end of the spectrum.
I am always curious as to why so many of them think their business is worth so much more? Many appear to have pulled numbers out of the air. Others end-up mis-applying what otherwise are sound valuation formulas. Still others simply forget that all of the liabilities on the balance sheet need to be cleaned up or eliminated in order for the business to be sold "free and clear."
If you are expecting the buyer to assume all of those notes and other liabilities you are mistaken. Too many owners think selling their business at their price should be simple. They expect that someone else will take over all of their headaches and that in the end they will be able to walk away with a fistful of cash. That's just not going to happen.
Imagine sitting across the desk from a seller and trying to decide whether this purchase is a wise one or not. The buyer is ready to commit what $250,000, $400,000 or some other amount. In the simplest of terms, he expects that this investment should produce some type of return on his investment, just as he would if he invested in the equity market.
By the way, if the buyer is buying the business as an on-going entity, then the equipment you are selling has to be sold free and clear. Remember, you can't sell what you don't own.
If the buyer is going to takeover the functions of a working owner, he (or she) also expects that the business should be able to pay themselves a fair market salary for managing the business on a daily basis, as well as generate enough excess money to pay the seller each month.
Can you explain to a potential buyer how this can be done? Can you justify your asking price based upon the above scenarios?
P.S. I have only known of two businesses that have sold for more than one year's worth of gross sales. Most businesses end up selling for somewhere between 25-60% of gross sales. Some valuations are higher and many more tend to be at the lower end of the spectrum.
Labels: Sitting in the buyer's seat
posted by The Quick Consultant at
10:37 AM
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