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

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

So you’ve decided it’s time to sell your business.

Whatever your reason(s) for selling, one of your first questions will be, “what can I sell the business for?“.

For most business owners, the logical starting point is the accountant.

After all, this is primarily a financial decision. The accountant has all the business details, knows the “interesting” transactions affecting the results, can perform the necessary calculations, and will have to deal with the tax consequences of the business sale.

Armed with the accountant’s appraisal or valuation, the hopeful business owner consults a business broker while dreaming of the exciting possibilities for the mountain of cash resulting from the sale.

Enter reality. The business broker has the unenviable task of informing the business owner that the expected listing price may be somewhat less than the number provided by the accountant.

“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.

Here are three reasons for the difference.

 

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

 

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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