Apart from buying a business the next most common reason for valuing a small family business is that it is yours and you want to sell out. In this case you are the one who is highlighting the good points about the business and perhaps burying the secrets. The question is, who do you rely on to set the selling price and how do you know it is right?
1. Business Brokers Have Their Own Agenda
Most vendors sell their businesses through business brokers and rely on them to set a selling price. This can be a mistake, for two reasons. Brokers want to make a sale and earn a commission. So the lower the price the quicker they will sell. This means they may browbeat you into setting too low a price or reducing your price if it does not sell quickly.
2. Brokers Are Not Trained To Professionally Value A Business
They tend to use “rule of thumb” formulas to set their prices. These can work OK for certain categories of businesses (e.g. convenience stores) where each business is similar to the next and there is a high turnover of business sales.
But if your business is a little different or and/or does not belong to these commonly sold categories, the broker may well guess at a price and is likely to get it wrong.
If it is too high, then no real harm is done. It probably won’t sell anyway, and if it does, you are the winner. And you can always lower the price.
But if it is too low and it sells quickly, you will not be a happy chappie when you find out later.
3. Accountants Are Not Really Trained Either
Don’t get me wrong here. I am not having a go at brokers. Accountants are not really trained to value these kinds of businesses either. During college or university they will learn about different valuation formulas, but they mostly apply to big business. And they have to get the experience themselves.
4. Neither Are Professional Valuers And Appraisers
Even professionally trained valuers don’t touch small family businesses. They learn how to value land & buildings and plant and equipment, and know all about the laws and cases that appear before Land Courts – but they are told to stay away from valuing goodwill. This is accountants’ territory.
5. So It Gets Left To The Brokers
And since goodwill is by far the biggest component of the value of a small family business, it gets left to the broker to value it, because there usually is nobody else. But what the broker is really doing is putting a price on the business, not valuing it. The function of the broker is to sell the business at the best price they can get, not to value it.
The rules of thumb formulas they use are shortcut methods to arrive at a price that they know from experience have been acceptable to buyers and sellers over the years.
6. Unless You Do It Yourself
The final option is for the owner to learn how the valuation process works and get involved in setting the price. This will give you a lot more confidence that the price is right and empower you to take over the selling process.