Now more than ever, we are getting calls from owners of privately owned companies who are seriously thinking about selling their company. Here’s our view on pricing your company.
Key point: Understand the seller’s goals … it directly impacts the pricing
Early in the process, sellers have to decide if they are really “serious” or just “curious”:
- What’s the motivation? Why now?
- Are the expectations reasonable?
- Is the time frame reasonable?
- Will sellers be flexible during the negotiations?
Key point: Know the “value drivers” that determine the pricing of privately owned companies
First question from a seller: “What’s my company worth? I hear it’s worth x-times something.” It’s just not that simple. A realistic value depends on several things, and it takes more than 30-minutes on the Internet to obtain an answer.
Considering Selling Your Business? Please click here for a downloadable e-book, “ 10 Ways to Increase the Value of Your Business“.
The value drivers for privately owned companies include:
- Cash flow (the “x-times something” reference)
- Key staff
- Business processes
- Recent trends (3-5 years)
- Additional investment in equipment (“capx”)
- Working capital requirements
- Current market conditions / cycles
- Recent transactions (“comps”) for completed transactions
- Financing requirements
- How the business compares to the industry norms
- Terms and conditions of the deal
- Buyer “type” – is the buyer someone in the industry or is it someone looking for an opportunity to own a business? Values will vary depending on the type of buyer.
- “Saleability”, a catch phrase for everything else
Key point: create a market with realistic pricing
Realistic pricing will encourage buyers to consider buying your company. There is no absolute price (until you agree), but there is a realistic price range. You can “offer” at a price that is at the upper end of the range, it just needs to be reasonable. Don’t waste time marketing your company with an asking price that makes no sense; no one shows up, no offers are made. Buyers conclude you aren’t serious and won’t waste their time when they have twelve other deals they are considering. Sadly, you lose potentially good buyers and risk losing them forever. And bringing them back to the table is really hard to do.
In general, we often get the most, though not always the best, inquiries during the first 90-days on the market. After that, if the interest is lacking, it might be time to revisit, redirect the efforts and consider if repricing is needed. Companies consist of bundles of assets and the market, thought unpredictable, will be the judge. Selling a privately owned company takes time and management.
Key point: Sum-it-up
- Serious sellers will prevail
- Pay attention to the key value drivers and price the business properly
- Give it time and follow the process
- Close with prices, terms and conditions you agree with
Considering Selling Your Business? Please click here for a downloadable e-book, “ 10 Ways to Increase the Value of Your Business“.
This article was written by Harvest Business Advisor Partner Ed Davis, CPA, CVA.
Clients choose Harvest Business Advisors for our accurate business valuations and our consistent ability to deliver a high price as part of a smooth exit transaction.
Harvest Business Advisors provides business brokerage, business valuation, and business succession planning services. We have extensive experience in the information technology and professional services, manufacturing, distribution, and contracting fields. We maintain offices in Maryland, New Jersey and Virginia. Connect with us at info@harvestbusiness.com or 443.334.8000 to discuss selling your business, ordering a business valuation or buying a business