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But avoid advice from well-meaning
advisors or friends who may have never sold a business
themselves nor understand much about what really goes on in the
seller/buyer marketplace. Such advisors can be preoccupied with
such pricing yardsticks as net income, price/earnings multiples,
book value of assets, etc., none very meaningful in the
valuation of small, privately held businesses.
What
Buyers Will and Will Not Pay For
The simple truth is that the
value of a business in an asset sale (a stock sale is a
separate issue) is determined primarily by its discretionary
cash flow (and its sister yardstick, earnings before
interest, taxes, depreciation and amortization, i.e., EBITDA)
and the fair market value of the tangible assets being sold.
Discretionary cash flow is the sum of monies available to a
new owner, the true earning power of the business –
not the net income shown on the tax return. Most owners have a
legitimate desire to minimize taxes and, thus, unlike a public
company, strive to suppress taxable net income.
You may wonder about the value of
the future potential of your business. Unfortunately,
most buyers are not willing to pay very much for potential
(though privately they might think highly of it!). Usually, they
are willing to pay only for historical results, what they can
actually get their arms around. They don’t feel that they
should pay you for their future investment of both money and
hard work.
 Some
less experienced buyers focus unduly on “hard” assets, the
value of equipment, fixtures and inventory, to “get something
for their money”. However, others understand that while many
of the best businesses don’t have substantial tangible assets,
they have very valuable intangible assets. The difference
between the purchase price and tangible asset value is the
“goodwill” of the business, which represents the accumulated
value of the company’s market position, sales growth,
reputation, customers and loyal employees.
Need for an Independent Valuation
Wise sellers invest in an
independent, formal valuation of their business by experts in
the business valuation process. Such valuations help determine
true market value and terms most suited to achieving the
maximum, supportable purchase price. Thus, an asking price
is established that everyone can understand and deal with.
Setting the right asking price at
the outset and agreeing to finance a significant portion of it
– is the best way to start on the way to a successful sale of
a business. When the price is too high, a potential buyer often
will not take the time to go beyond a superficial review.
The R. F. Meadows Company strongly
recommends to all prospective clients that an independent, third
party valuation be conducted before determining an asking price.
The up front cost to the seller is minimal and, moreover, is
credited to the seller, i.e., deducted from the Meadows fee at
closing. The cost of a professionally-conducted business
valuation will be repaid to a business owner many times over.
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