Price is the primary issue for most sellers and a key issue for many buyers as well, although there may be other issues for a buyer of similar import. The buyer and seller are acting under different levels of compulsion, with a different bias and with conflicting interests. The Selling Price is certainly the issue most fraught with potential for disagreement between the two.
In our view, the objective of both parties should be Fair Market Value. Of course, some sellers will expect a windfall for their business and some buyers will want to steal it, but those are not the likely. Both are the extremes; generally unrealistic and improbable unless some compulsion exists beyond normal motivation or unless someone is caught snoozing.
More typically, and ideally, the seller will want “no less than” fair market value and the buyer will want to pay “no more than” fair market value. These are realistic expectations. They setup win-win expectations focused on “what IS fair market value.”
In our view, fair market value is the amount at which a business will change hands
- from a seller who is motivated but not compelled to sell,
- to a buyer who is motivated but not compelled to buy,
- under terms and conditions acceptable to both parties,
- when both have possession and understanding of the relevant facts.
The Selling Price: Any full and fair market price valuation must factor the balance sheet value, along with a reasoned and justifiable calculation of sustainable earnings, (EBITDA – earnings before interest, taxes, depreciation, amortization), cash flows, tax consequences and the recent and current trends of the company. Discretionary and non-discretionary spending must be also factored, and any estimation of sustainable earnings should also consider the type and “appeal” of the business; barriers to entry; potential for new management to bring improvements; potential and probability for expansion and growth; market and industry economies and trends, and more. Payment terms versus no payment terms will also be an important price-determining factor.
Again, since price is obviously of major importance to both parties, consideration should be given to each factor influential to the value. It is important to ensure that the asking price be full market value. Equally important, is that the price is not unreasonably more than full market value. Asking too much will simply discredit the seller and the business to many of the best buyers, immediately, often without appeal. Asking too little will ensure too little. Somewhere between is a realistic, full and fair market price.
… see the ‘ValuPro’ section of this web-site for valuation demonstrations.
Whatever is considered, calculated and valued, at the end of the day the price must seem reasonable and be acceptable to both the seller and the buyer, or there won’t be a sale. The seller should strive to achieve that consensus without exposing the business to a parade of would-be buyers. Ideally, in preserving confidentiality to the greatest extent possible, the seller will want to offer the business at the right price, to the right buyer and to no others. This is generally not practical, or possible, but limiting exposure must be the goal. Achieving that goal requires material preparation and solid price justification.
Pricing should be a first step in our selling process. Re-pricing should be the final step. The fact is; the full market value of a profitable business will generally be greater on the last day of the selling process than it had been on the first. If full market value is to be achieved, final sale price must be based on last day valuation. It will, therefore, be important to incorporate an adjustment formula that would allow the sale price to be increased on that last day, before the sale closes, without alienating the buyer and killing the deal. Again, this too is achievable with thorough preparation and solid justification of the process.
In the preceding section, we set out seven distinct and deliberate steps to the selling process.