Why Your Accountant and Business Broker May Recommend A Different Asking Price

Why Your Accountant and Business Broker May Recommend A Different Asking Price

Whatever your reasons for selling... retirement, a new opportunity, or simply time for a change, one of the first questions most owners ask is... "what can i sell my business for?"

For many business owners, the first stop is the accountant. That makes sense it’s a financial decision, after all.

Your accountant knows the ins and outs of the business, understands those "creative" entries in the books, can crunch the numbers, and is well-placed to advise on the potential tax implications.

Armed with an accountant’s appraisal or valuation, the hopeful business owner often heads straight to a business broker already picturing the payday and future possibilities.

Then comes the reality check...

The broker, with their finger on the pulse of the current market, may gently (or not so gently) break the news that the expected sale price may be lower than what the accountant estimated.

Why? Because selling a business isn’t just about numbers on a spreadsheet it’s about market demand, buyer risk, industry trends, and the business’s ability to keep performing without you at the helm.

“How can this be?” cries the disappointed owner. “Did my accountant make a mistake?”

Probably not - there is a difference between intrinsic value (which is the domain of accountants) and market value that a potential seller needs to consider.

Preparing for a business sale involves more than just getting the books in order. You need to understand what buyers are actually looking for and that includes documented systems, stable cash flow, and future growth potential. 

So before setting your sights on that mountain of cash, it pays to get a realistic picture from someone who knows the market.

Here are three reasons for the difference between an accountants and a brokers valuation.
 

1. Valuing future profitability

An accountant's appraisal will focus on the business's profitability, particularly future profitability. In most cases, a buyer will ask, “how much am I prepared to pay for potential profits? If these are to materialise, I will have to make that happen. “

Because of this, a buyer will place less value on potential profits than the accountants' valuation models will.  This is not to say buyers consider future profitability unimportant, but everyone values potential differently.

 

2. Market conditions
 

Most accountants are not acutely aware of the current market conditions for selling a business (except accounting businesses).  Conversely, business brokers are very aware of current market demand and can adjust the listing price to allow for these factors.

However, individual brokers will have differing views of the market conditions and how those may impact a sale price of a particular business in a specific location.

This is why it is important to get an appraisal from multiple business brokers, so you can set yourself up with a realistic asking price. 

 

3. Desired Return On Investment

Even if everyone agrees on the future returns from the business, varying appraisals are still likely.

When considering the business sale from a buyer's perspective, a return on investment (ROI) is often considered when determining the price they will pay. 

Therefore, the seller needs to take the ROI into account when setting the asking price. This ROI percentage can vary. 

Each potential buyer and their advisers will have a different target return. Some buyers may be prepared to accept a 20% return, while others will expect much higher returns. 

The ROI can influence a buyer's willingness to buy a business. 

Assuming everything else is constant, a business returning, say $100,000 annually may be valued at $500,000 by a buyer who will accept a 20% return but only $200,000 by a buyer expecting a 50% return. 

So a buyer may place a different value on the business due to their own ROI expectations. 

 

Where does this leave a vendor preparing to sell a business?

 

Selling a business is an important stage in the business owner’s life, and the desire to “get it right” is understandable. Therefore the vendor should:

1. Understand the factors that will affect the value of the business. Profitability, loyalty of customers and staff, growth prospects for the industry, age of fixed assets, general economic conditions, and quality of operating systems are some of the factors to be considered.

2. Consult various experts. Yes, consult your accountant, but also talk to a few business brokers (local and national) to have a clearer idea of the range of possible values.

3. Be prepared to negotiate. While your broker can guide you, you will need some flexibility on price and conditions to achieve a successful sale. 

Always remember value (like beauty) is in the eye of the beholder. The only objective measure of the value of a business is the number on the signed sales contract. Before that, any number contains an element of opinion - whoever prepares the appraisal.

Tags: business broker selling small business

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