-Can Your Business Broker Defend the Value?

Sell Business

As the owner of a business you have made the decision that it might be time to execute your exit strategy and sell. You have met with a few professional business brokers and there is quite a disparity in their opinions of value. Understandably your gut instinct like most sellers is to go with the higher price and potentially maximize your profit from the sale. There are additional considerations that you may want to think about.

I would like to briefly describe distinctly different business brokerage companies and the way they approach listing opportunities.

The first example is the sales driven organization that gives little thought to proper valuation. They are driven by the mantra “Take the listing no matter what. The market will determine the price. We need Inventory, inventory, inventory”!! You may have had interaction with brokers from these companies when within minutes of reading your financial documents they have miraculously determined the value! Or even more suspect is when the broker doesn’t need to see financial documents as “he knows what businesses like this are selling for.” Or the broker doesn’t have an opinion of the value and agrees to list it at whatever you the seller thinks the value is.

A different example is the business brokerage that perhaps overthinks the valuation process. They are driven by the mantra “we will not take a listing that we don’t perform an appraisal on.”  You may have had interaction with brokers like this before that want to sell you a valuation and perhaps credit the valuation fee back to you at closing.

There is a sobering statistic that is well known in the business brokerage community that few business owners know anything about. You should familiarize yourself with it because it is a sobering and startling statistic and knowledge of it can provide you with some guidance after you make the decision to sell. It is a statistic that has been observed in our industry for years. Here it is: We call it the 90% rule. 90% of buyers never buy anything and 90% of listings don’t sell. Through my professional experience of 20 years and observations within the industry I must conclude that this 90% rule is true. The reason I believe it is true is that most businesses are priced incorrectly and they are priced incorrectly due to the fact that either the broker is lacking in valuation skills and or the broker believes that it’s not important to get the value right because he incorrectly believes the market will sort it all out.

If we could analyze the data in the business brokerage industry I think we would find that those businesses that are valued correctly have a much higher rate of being acquired and sell for a price closer to the value than the businesses that have been haphazardly valued and I believe this is because the value was defensible.

Understanding the fact that the odds are not in your favor you the owner / seller must look deeper than the just the highest value and ask the broker the following question, “Can you defend that value?” “Show me how you will defend that value”. The broker’s answer to that question may tell you if you are likely to be victim of the 90% rule or if you are going to be an exception to the 90% rule.

Defending the value is not easy. It is not just about showing the number that appears in a fancy looking appraisal or valuation and assuming that a prospective buyer will agree with it. It is about truly understanding the business and what value drivers exist or are absent and understanding what the conditions are in the marketplace at the time of sale.

So pick your broker carefully, don’t be distracted by the highest price and demand that the broker show you how he will defend the value.

Visit us at www.arizonabizsales.com. Thanks!

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