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Seeking an Unrealistic Appraisal of Your Business' Value
Pricing is crucial to selling your business. The right price draws in buyers, but the wrong price turns them away. Many owners make the mistake of overpricing their business. An unjustified value can make buyers walk away — for good. And if buyers walk away, your business is sitting on the market for longer, quite possibly losing even more value. Take the time to get the price right, and you’ll find it much easier to sell your business.
You Can’t Sell on Potential
The first thing to understand is that a buyer is not interested in what your business might be able to do. They’re interested in what the business is doing. The truth is, every business has potential. Converting that potential to dollars is going to require the new owner to invest time, money and skills, and the potential may not even be realised. Valuing based on potential means the new owner is paying you in advance for the improvements they make.
If you claim your business is full of potential, a buyer will also question why you haven’t exploited it yourself. Your broker can help you talk about potential in ways that make your business attractive to buyers, but you can’t rely on potential to raise the value of your business.
Many business owners get caught up in the value of their assets and weigh them heavily in their valuation. Assets can help increase the value of your company, but buyers are interested in how those assets translate to cash flow. It’s no use being asset-rich if you don’t have enough money coming in to maintain those assets and any loans associated with them.
Buyers also look at whether earnings can be maintained. If your profits have held steady or risen in the past few years, this will be reflected in offer prices. In the same way, if your profits have been decreasing, you will have to lower your valuation.
Keep in mind, your buyer will also look at global and industry trends when deciding on an offer. Changing demographics, government policies or environmental concerns can affect the value of your business. Technology can have a particularly large effect on value. If the potential buyer is aware of technological advances in the industry, they may think your earnings aren’t maintainable. One example of this is video rental stores. They were once a great investment but have mostly closed as the internet and Netflix have taken over the market.
It’s very rare for owners to value their businesses accurately. In fact, some experts believe that as few as 10 percent of business owners have a realistic view of the value of their business.
Owners have usually spent countless hours, effort, sleepless nights and plenty of stress on building their businesses. As a business owner, you want to include all that sweat equity in your appraisal, but potential buyers aren’t interested in that. They’re only interested in whether they’ll continue to make a profit from their purchase.
The other issue you have as an owner is that you know what you need to make from the business. Owners often want to retire, travel or invest in a new enterprise so they reverse-engineer an appraisal, naming a price that matches their wants rather than on fair market value.
Because objectivity is difficult in the appraisal process, going to a broker is the best way for you to get an accurate idea of your business valuation. Brokers understand the different ways to value businesses, the standard in your industry and current market trends, which all contribute to a fair price.
In the end, your business is worth what someone is willing to pay for it. If you have a realistic view of the value of your business, you’ll be able to find the right buyer, and there’ll be no surprises when you see the offer that they make.
For further information, contact your nearest LINK Business Broking Office.