Seller Pricing Part 1: Letting the Market Close Your Valuation Gap

Very few businesses on the market will sell on their first attempt. Unfortunately, too many sellers have a large gap between the amount they believe their business is worth and what it will actually go for on the market. This can lead to a lot of abandoned business sale transactions.

But, if a business owner has a more reasonable expectation for their value, they are more likely to sell when an offer comes along.

As a business broker, if I sell your business for under market value, I take a loss as well. But, if we never sell your company, there is no profit to be made for either of us.

Some brokers choose to work up mock letters of intent for their clients to prepare them for real market offers. But, I believe presenting my clients with a realistic analysis of their business can do the same job.

How the Market Values Your Business

When I talk to my clients about why they are valuing their business at a certain process, I often hear things like, “This is what I need to retire,” or “I invested this amount in the company, so this is what the payout should be.” But, unfortunately, that’s not the way the market works.

All that truly matters is the characteristics and circumstances of your company today.

Things like your:

• Contractually Recurring Revenue – When you sell a product one time, it has an impact on your business’ bottom line. But, when you can sell a subscription to your service or product, you can increase your business’ projections for sales down the line. This can significantly reduce the amount of risk a buyer is taking on making you more likely to sell your company for a higher price.
• Competitive Advantage – If you have an advantage over other businesses in your field, that gives you the power to set your own price. This can be a meaningful way to reduce the risk for potential buyers.
• Growth Rate – The higher your growth rate, the more your business is able to sell for. In order to calculate a growth rate, you will need to use a valuation model to justify your price.
• Customer/Client Concentration – Having a variety of different customers is a lot more valuable to a buyer than a business that does most of its work for one client. If your business relies on a majority of your income from one client, be prepared to be on the market for long enough to prove to a potential buyer that the client isn’t going anywhere.

Businesses Selling Intellectual Property and Software

Companies that make software or sell a product that is built using intellectual property have a much harder time selling on the free market. After all, trying to set a price for their company is difficult.

With asset-based valuation models, you can use comps to provide a range of expectations. But, with non-asset based businesses, it can often come down to what buyers are out there and what they are willing to pay.

The best thing to do is to create a competitive bid situation where the market can fight it out for the sale. In this case, it’s all the more important to work with a business broker because they are able to contact potential buyers to create the perfect storm.

How a Business Broker Allows the Market to Decide Value

Whether your business is asset-based or relies on intellectual property, or whether it’s reliant on one customer or hundreds of thousands, at the end of the day your sale price will be what the market will bear.

As a business broker, I’m not the authority on what your company is worth. The buyer is. But, I do have a lot of experience that tells me whether or not a deal is good and helps me identify the right buyers to trust. I will only bring qualified potential buyers to your table that set a realistic valuation amount for your company.

I will help steer you towards the most stable and profitable deal on the table. Contact me today for a free consultation.

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