July 17, 2020
When a business owner puts the business on the market, arriving at the proper value, and subsequent the asking price, for the business is critical. Too often owners place unrealistic, unachievable, and arbitrary asking prices on the business and then proceed into the sale process only to be disappointed with the market’s response. This frequently results in price reductions, delays, and lost opportunities to sell to qualified buyers who are put off by unsupportable asking prices that are not in line with the value of the businesses.
The bottom line is that the intrinsic values of all businesses are rooted in “financial fundamentals”, such as; the strength of sales/revenues, earnings and free cash flow, and “operational parameters” such as; work force, competitive position, branding, customer concentration, etc. A rational asking price is an extension of the intrinsic value of the business and is developed from some combination of the fair market value of the operating physical assets (e.g; equipment, inventory) and intangible assets (e.g; goodwill, customer base, intellectual property).
Business brokers are frequently asked by owners to tell them what their businesses are “worth” for the purpose of establishing an asking price. However, business brokers don’t assess the worth, or value, of businesses – that is the job of business appraisers. Rather business brokers analyze the business for the purpose of establishing an asking price that makes sense to the owner and prospective buyers and for initiating negotiations. So the question is less about value or worth of the business and more about what a prospective buyer might be willing pay for the business given an entire array of facts associated with the business being sold.
Based on their market knowledge of a wide variety of businesses, business brokers typically provide a “broker’s opinion of selling price” at the time they list and offer a business for sale. The Broker assists the owner with determining the approximate current fair market value of his/her business with the intent to negotiate the best asking price with interested prospective buyers.
Many times the Broker will use professional business valuation formulas, published resources, expert opinions, market comparables, and his/her experience with the Arizona market to recommend a realistic asking price. Importantly, the broker will help you understand factors affecting the value of your business and will identify and appropriately allocate the value of assets during a transaction.
Additionally, there are several quantitative methods used by business appraisers that are applied to the valuation of businesses. These more comprehensive methods are sometimes employed depending on the size of the transaction and financing requirements. They include the balance sheet approach (book value, liquidation value), income approach, and market approach. In most cases, buyers will pay for formal business appraisals as part of their due diligence process, just as they would if they were purchasing real property. In some case, sellers will pay for a business appraisal in anticipation of questions about the asking price being in line with the value of the business.
Your Broker can provide you with an analysis of the current market value of your business. Should a formal appraisal, such as those needed for loans, estate planning, divorce or other legal situations be necessary, your Broker has many resources that are qualified professional business appraisers that can provide such services.
Please contact us for more information.
Filed Under: Seller Articles, Valuation
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