What affects the final sales price of a business?
Many sellers rely on casual advice from friends or simply a general rule of thumb when determining an asking price for their business. Regrettably for them, prices determined by using general multiples or rules of thumb may be too high or too low.
Without having a thorough analysis of the business completed by a REINZ Accredited Business Broker, the owner may run the avoidable risk of not knowing the true value of their business. If the business is presented to the market at too high a price, the time to sell will be prolonged unnecessarily costing the seller valuable time and money until ultimately a concession is made. If pitched too low, then the seller will not realise the full benefit of their years of work.
There are a number of key elements which affect the final sales price of a business including:
1. The quality of the information supplied to the buyer
2. The quality of the marketing programme
3. How much competition there is in the market place
4. The external environment
5. The skills and experience of the negotiator
1. The quality of the information supplied to the buyer:
A buyer needs access to clear, concise information about the business in order to make an informed decision regarding firstly, whether to proceed and secondly, at what level to proceed.
The “Business Information Memorandum” is relied upon by the buyers and their advisors to provide this vital information; it needs to contain verifiable proof that the value of the tangible and intangible assets is as stated. The buyer will be conducting a detailed analysis of the business – if any detail has been overlooked you can be sure they will find it.
The more pertinent the information provided to the Business Broker by the seller, the better placed the Business Broker will be in to create in conjunction with the seller, their solicitor and accountant, a profile that accurately represents the business and its assets.
The time invested in creating the “Business Information Memorandum” in the short term will greatly enhance the saleability of the business in the long term.
Read more on Buying a Business
2. The quality of the marketing programme:
The purpose of a marketing programme is to find the buyer or buyers who will be motivated to purchase the business. A professional Business Broker will have at their disposal any number of different mediums to market the business and will be able to advise a seller on the pros and cons of all of them.
A marketing strategy specific to the individual business needs to be formulated – one size doesn’t fit all.
3. How much competition there is in the marketplace:
An attractively packaged and presented business will create more interest and competition among buyers.
Within any industry or marketplace, buyers are very quick to recognise a ‘product’ that isn’t priced fairly or is being offered on unreasonable terms. Buyers will swiftly identify such ‘products’ and rapidly turn their attention to more attractive offerings. When a seller asks more than what is fair and reasonable for their business, they will find there are few (if any) buyers.
A business that is presented to the market at a realistic price and with reasonable terms will attract more buyers, creating multiple interest. When a buyer knows that they have direct competition from other buyers they will be more inclined to place their best offer rather than risk missing out and having to start the whole process of sourcing a business again.
4. The external environment:
Most people agree that the environment within which a business operates is influential upon the health of a business.
Changes or uncertainty in the external environment including the economic, socio-cultural, legal-political and technological elements all have a positive or negative influence – consider for a moment bank interest rates, net migration, unemployment, or the political scene.
Although a business can control its own internal environment, it does not operate within a vacuum and will be influenced by what is happening in the bigger picture.
5. The skills of the negotiator:
Just as you wouldn’t consider doing your own tax or law work, you know it makes sense to engage a professional to act as your agent when it is time to sell your business.
The skills and experience of the professional Business Broker are paramount in structuring and negotiating the Sale and Purchase Agreement. By not being emotionally tied to the transaction, a Business Broker is in a position to more effectively negotiate on behalf of the seller. Fully understanding the value of the business places them, as your agent, in a strong negotiating position.
All parties involved will seek assurance that they have negotiated the best price and on the best terms available to them at that point in time.
Read more on Selling a Business
REINZ Accredited Business Brokers are involved with buying and selling businesses every day – it’s what we do. Using the talents and skills of a REINZ Accredited Business Broker will be a step in the right direction when it comes time to sell your business.
Business owners, are you ready to sell your business? Get started by contacting me: Contact Sharon
March 05 2008 12:36 pm | The Professional Business Broker
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