Setting the price for a business is key to a successful sale. Setting it too high will eliminate buyers that don’t want to waste their time on something with a low probability of success. Setting it too low will make a quick sale likely but rob the seller of benefits he could have realized.
My proven approach to achieving a successful sale and liquidity event for business owners is to use my proprietary discounted cash flow model viewing the company’s performance from the viewpoint of the buyer. The model considers the anticipated capital structure of equity, outside debt, and possible seller financing. Future cash flow for the company is modelled based on historical performance projected with reasonable growth for a 10-year period. Finally, the potential value of the business at the end of the 10-year period gives the buyer’s view of the complete ownership cycle. of the business. The input to the model is historical data and assumptions approved by the seller applied to a rigid calculation showing the expected financial results to the new owner. While no approach to valuation will hit the target for a random, specific buyer, it will bring the pricing into a tight range where a successful negotiation will result in a successful sale. This is known as “Phase 1 Valuation” of the sales process, an independent step that it is key to properly packaging and presenting your business for sale in Phase 2 Execution.
If the seller desires, or the business is complex, I can have a third-party appraisal completed by an experienced, independent, third-party valuation firm. I use a business valuation firm that is nationally known and has completed over 30,000 assignments. This appraiser is certified by the American Society of Appraisers and the Institute of Business Appraisers, and his report shows eight separate valuation approaches, and a weighted reconciliation for his opinion of market value. While this added cost option usually generates a more conservative value, the reconciliation and synthesis of value reported can be of significant value to the seller in his decision.
The results of the Phase 1 Valuation are the confidential, personal property of the seller, so he can begin the process a little more aggressively, knowing he, the seller, has a target to fall back to if an attractive buyer seeks to negotiate. The overall result is a high average of completed transactions and satisfied sellers.
