Valuing a Business

Valuing or Pricing?
 
Whether you are selling, or buying a business the price is possibly one of the most important numbers of the whole deal. 

Business valuations that are carried out by registered valuers can be a complicated and very precise process, which may also be very costly. These valuations take many factors of the business into account but may not always reflect the true market value of the business at the present time.  

Many people that value businesses are not able to establish the true market value because they do not have access to the market information. It is very important to understand that the current market value is the figure that similar businesses are selling for and not the advertised price. Many small business owners will look through private listings of businesses for sale on the internet or in the newspaper and assume that their business is worth the same as others listed. What you need to consider is that most business owners tend to overvalue their own business and although the business maybe advertised for a certain price there is no way for most people to tell how long the business has been listed, how much, if any interest there has been, and how much the business eventually sold for.  

Real estate agents use direct market comparison whenever possible to check valuation figures of new listings. Through the use of software such as RP Data and Red Square the agents are able to check the actual selling price of houses in the neighbourhood of the one that they are valuing, or to use the correct term, “providing a current market appraisal on” Unfortunately there is currently no way of carrying out the same process for businesses.  

If the sale of your business is due to unusual circumstances, ie a probate sale, sale of shares from one partner to another, a family dispute or any other contentious reason it is probably best to employ the services of a registered valuer. If your business sale is more straightforward then it is probably better to use a more simple “Pricing” method to establish the price that you will sell for.   

Pricing a Business  

Pricing a business is not an exact science, although you will consider many of the same points as a professional valuer pricing is simply an attempt to arrive at a fair current market value. As mentioned earlier, the best way to do this is to compare your business with other similar businesses that have recently been sold. A very good way to do this is to consult Business Brokers, they will have dealt with similar business sales and will be able to provide you with an overview of the current market situation. Many people who set out to sell their business on their own use this approach, and business brokers are aware that people do this. In order to prevent this some brokers charge a consultation/market appraisal fee, others that are more pro active will use the meeting to try and convince the vendor to use their services instead of selling privately. Experienced brokers will be able to walk into your business and have a very clear idea of the value straight away.  

Pricing really can be this easy, it stands to reason that the closer the advertised selling is to the true market value the quicker the business will sell. Leaving the business on the market for a long time is not a good idea, it is much better to advertise at a suitable price in the first place. Many people will inflate the price to allow for buyers to knock them down but this is not always the case and sometimes it pays to think differently. If the market is tough it may be better to advertise for the price that you would settle for, it is much better to generate several inquiries and have buyers bidding against each other. In many cases of businesses being advertised like this they have sold for the full asking price, and in some cases above the listed price.  

The Four Methods of Valuing a Business
Valuing Goodwill