There are many valuation methods that can be applied to businesses for sale and sometimes we make the mistake of thinking that they are critical to the analysis of the business we are buying or selling. Relevant, yes. Critical, maybe not. The reason that I write this is that the sale of your business is unique. Your business has an unexplored upside and a history of financial stability. It is not the same as other businesses in your industry. It is not the same as your competitors’. Automobiles and homes that are for sale exist in large numbers that can easily make a “market”. Comparing one to another is straightforward and meaningful. This is not true of many small- to medium-sized businesses.
If you are selling your business, its financial stability speaks volumes to the comfort that it has provided for you and to the future comfort of the prospective purchaser. If you are the seller, the unexplored upside may put more money in your pocket if the new owner is confident that he can exploit that opportunity. Unexplored upside adds value to the purchaser in that he may consider paying a higher price. Many prospective purchasers believe, however, that the risks associated with growing the business and their associated returns belong to the risk-taker and are not willing to pay a premium to a seller who has chosen not to take those risks.
I want to explore this topic in future postings because sellers often have unrealistic expectations in regards to the upside of their business and its resultant value. Sellers who have seen a decline in business performance tend to balance this negative with the thought that a new owner could easily grow the business by doing something that they were (and are) unwilling to do. As business brokers, we help position these businesses so that the prospective purchasers have a clear understanding of what their efforts are likely to yield in terms of future results.