I’ve found that most people tend to overestimate what their business is worth.
It has often been said that every business is for sale if the price is right. The key question then is how much would you sell for.
When this is raised as a conversation starter, few people respond with “fair market value”. In fact the most common response is to think of the amount of money that could support the lifestyle to which they would like to become accustomed. While this may provide some dreamy moments, it won’t help if someone seriously inquires about buying the business.
If you are in a multi-owner-operator business, then the sale discussion should be on the agenda at least once a year. The reality is that if one of you wants to get out, the other owners are the most likely buyers.
A very simple exercise is for each part-owner to nominate their buy and sell price for the business; that is, how much they would be prepared to pay if they were buying the business and how much they would accept to sell. This should be done with no commitments attached, but rather as a means of bringing the owners to a point of realistic expectations.
I witnessed one part-owner set their sell price at 20 times their buy price, and although this may be interpreted as an unbending commitment to their business it defeats the purpose of the exercise.
The idea is that by looking at the business as both a buyer and seller you will be better able to see the value of the business. In most cases a sell price of up to 20% more than the buy price is reasonable. It should also generate some meaningful discussion about what could be done to make the business more valuable.
Another key discussion point that should be covered is what is required of another part-owner other than the money. Some businesses set all sorts of criteria for their would-be investors, perhaps mistaking them for life partners rather than business partners.
A question to put to them is how much extra money is required to accept the absence of these personal attributes. The investment value can then be set at the price and discounts considered for any other benefits their involvement might bring.
One final thing to do before setting the price is to double check that you are being realistic. A very easy way to do this is to check your business value against the current market for your industry and turnover. This can be found in the BizExchange Index, a quarterly publication of business values in Australia.
If you think you won’t be owning your business five years from now, then it is time to start seriously considering how to prepare your business for sale. This is because it will take longer than you think to prepare, and it can take a while to sell – but more on this next time.
Andrew Kent is a director of BizExchange, an independent marketplace for business for sale or seeking investment. BizExchange has a directory of independent advisers and business brokers and information on valuations.
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