How To Price A Business For Sale

Price, Return, and Risk are Important Considerations

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The most important skill a business broker needs is the ability to give prospective clients accurate advice on the ‘price’ that the client’s business is likely to achieve in the market.

Yet, it is probably the weakest skill present in most business brokers, and often the major reason why the sales process for your business fails.

This is because it is vital that we understand the relationship between ‘return and risk.’

They are the same, however, they are interpreted differently by buyers and sellers.

Risk

Most business advisors focus on risk.

‘Risk’ is about not receiving the earnings (profits) expected, on time and without default. By default, we mean that profits are delivered in full at the time they were expected. So, if profits are not as expected, then there is default.

Example:
The high-quality freehold accommodation business offered for sale for a million dollars with the amount of net rent received at $100,000 represents a 10% return.

10% is also the risk associated with not receiving the anticipated $100,000 annually. There is a 10% chance of default, either in the amount due ($100,000) or in the timing when it is due.

Return

Most business advisors working with a business owner, or a business seller will use the word return.

‘Return’ in a business (or anything else for that matter) is about buying a stream of future earnings (profits). Return is usually expressed as a percentage of the funds invested. 

Example:
A high-quality freehold accommodation business is placed into the market at a price of one million dollars offering a ‘10% return’ ($100,000 annually).

This means the seller is asking the buyer to pay 10 years’ worth of future profits now, for the benefits of owning the business.

$100,000 pa over 10 years =  $1,000,000. Conversely $100,000 divided by $1,000,000 = 10%.

Wondering what your business may be worth?

The Conflict

Hence, business sellers tend to emphasise return they are offering but buyers place their emphasis on risk when they are buying. The seller is emphasising the reward for the funds invested. The buyer is weighing-up the risks of not getting that return after they’ve invested the funds. 

Advisors to buyers (accountants in particular) give business owners and business sellers conflicting advice on ‘price’. Because they are not in the business sales marketplace. They seldom know the state of the market, and very likely, have little market evidence to support the advice they are giving.

Often, the advice that these people give business owners is well above the ‘price’ that will be achieved in a sale.

Unintentionally, those same advisors, lacking in market knowledge and evidence, will indicate a ‘price’ well below the market to their business buyer clients.

Business Brokers will present the market evidence without bias to both buyers and sellers.

Enquirers must stand their ground. And always ask if there is market evidence on which the advice is based. That’s a fair question. 

A professional broker’s advice will be based on market evidence, not just calculations.

If the ‘informed advisor’ will not move their position on their advice, move on because a successful business sale transaction is unlikely.

Let those giving the advice be responsible to their clients for it.

We do Business Valuation.
Call 1300 551 757 Now to Get Started.

Who will buy my business?

There are lots of prospects out there looking for business opportunities.

Some will be ‘ready, willing and able’, some are doing their research on what is available to meet their preferences.

Some are just in the ‘wannabe’ category who constantly browse, constantly ask, constantly demand and never buy anything. These are probably quite risk-averse and risk averse people don’t buy businesses. They seek more secure income arrangements like those provided by regular wages. 

All business owners possess characteristics that the features of their business appeal to. That’s probably why they brought it or built it in the first place.

These characteristics present clues on who will buy.

Another point is that offering the business to a broad range of prospective business buyers is unlikely to generate a genuine enquiry. ‘Blasting-out’ a notice your businesses is for sale to everybody and anybody can actually alienate your audience and push them to unsubscribe or mark as spam. Far better results are obtained by aiming your advertisement to those who want the business in the position it is located.

When you narrow your focus on ‘who will buy’ you will save time and money; scattergun approaches may eventually work, but the risk is you will run out of energy, time and money before you stumble upon the right candidate.

Marketing to the right audience is not easy. It is not just a matter of throwing an advert up on Gumtree and waiting for a call. 

It’s not something you do in 15 minutes, it takes time.

Take the time now to find the best media platforms to advertise your business to reach people who would want to buy it.

And Get Your Selling Price Accurately Assessed

Don’t be the scrap in a broker’s junkyard.

A junkyard usually looks like a junkyard and only those interested in junk will go there. They will pick and choose and pay very little for what they want.

Why? – Because there’s lots of junk to choose from.

8 out of 10 businesses don’t sell because they are:
• poorly priced; and/or
• poorly presented; and/or
• poorly advertised.

90% of sales enquiry is lost on price alone.

If it’s not viewed as value for money, the prospective buyer will not enquire. You will simply never hear from them.

Genuine buyers will simply walk away because they want something better.

Advertising a junk listing as a business opportunity is an unethical approach by some to simply generate income from advertising. It costs little to implement, but you, the business owner, will have sacrificed your money, credibility and most importantly – your time.

Not just that, you will still be owning and operating your business for months if not years to come.

It’s a very simple fact:

If it’s not a fully documented, well-prepared business, priced to attract real buyers and it isn’t advertised for what it is, and where it is, don’t try and sell it, because you won’t.

You will lose your most scarce asset; your time.

If you think the person who wants to sell your business doesn’t understand your business in detail, how do you expect them to sell it for you?

If they haven’t taken the time discussing your business with you to gain a detailed understanding of how it operates and why it makes money, that person will have little chance of selling it for you.

Professionals don’t list what they can’t sell. Those who do simply want to make money from fees and have no interest in selling your business. It’s a bonus if they do!

For a professional advice on how to sell your business, click here or call 1300 551 757 now.

Kevin Lovewell

M: 0401-308-385
E: Click here to contact Kevin Lovewell
Member & Registered Business Valuer
Australian Institute of Business Brokers

Graham Long

M: 0428-649-791
E: Click here to contact Graham Long
Member & Registered Business Valuer
Australian Institute of Business Brokers

Kevin Lovewell

M: 0401-308-385
E: Click here to contact Kevin Lovewell
Member & Registered Business Valuer
Australian Institute of Business Brokers
What others say about Kevin Lovewell

Graham Long

M: 0428-649-791
E: Click here to contact Graham Long
Member & Registered Business Valuer
Australian Institute of Business Brokers
What others say about Graham Long

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QLD4510 Australia
Call 1300-551-757