One of the biggest challenges to reaching a good deal is agreeing on what the business is worth. At a fundamental level, a business is worth what a willing buyer will pay to a willing seller. Now that we’ve gotten the obvious out of the way, many buyers and sellers often need assistance in determining what the value “should” be, or at least how to go about determining what a fair price is.
Get Skilled Advice:
A great place to start can be with a professional that is experienced with the current valuation methodologies in that market (such as an appraiser or investment banker). Relying on inexperienced or untrained advisors can have extreme consequences either in the form of overpaying, or missing out on a good deal on market terms. Those opportunities may not come back around. We’ve encountered industries where the EBITDA multiple a buyer is willing to pay ranged from 5x to 22x based on the size of the business and other factors – a good advisor will have the experience and training to help set reasonable expectations about where value is at, and where it could be with the right changes.
Often, an appraisal can cost as little as a few thousand dollars, or can be provided as part of a separate paid engagement. Those dollars can be really valuable, and the report that often accompanies the appraisal can provide really useful insights for the buyer and seller to understand how to optimize the value of the business. Many banks will also require an appraisal as part of a financing process.
Factor In What Value Will Be Lost:
Another step we recommend is for the parties to take time to think about what value is going to be lost as a result of the transfer to minimize the value lost, but also to think through how that loss should impact purchase price. The loss of a key team member or key customer, for example, can cost a business hundreds of thousands of dollars.
Understand the Seller’s Connection to the Business:
Sometimes, a seller values the business at a price greater than what a buyer is willing to pay. Being a business owner, especially as a founder or as part of a family business, can result in a really strong connection between the seller, their personal identity, and the business. Understanding that can help the parties have a better conversation about price.
These resources are provided for informational purposes only, and are not legal advice. No attorney-client relationship is formed through this page. Please contact us if you’d like to inquire about our services.