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Phil asks, ‘Can we trust the valuation that a
business broker puts on a business?’
When I was a business broker, people would come to
me with their businesses and I would evaluate them. I would do what was called a Most Probable Selling Price evaluation. I'm pretty good at it and I still do them
today for people who want to have a value put on a business. Generally
my MPSP prices would come out within five or 10% of what the actual end result
selling price would be, so they were pretty accurate.
Back to Phil’s question; If the business broker is
qualified and competent, knows what he is doing, has experienced proper
training and you hire the broker to evaluate a business, then probably you're
going to get a pretty good accurate idea of what the business is worth.
If you go to a business broker and say, ‘Show me
businesses for sale and what are the asking prices?’ That’s not the same question at all.
In my own experience, I would do an MPSP and then
the seller would set their own asking price.
Now if I told someone that their business was worth
$220,000 and they said they wanted to ask $500,000, I wouldn't take them on as
a client. I would tell them to try
somebody else because if it's just so far out of whack to what is reasonable,
it is just going to be a waste of the broker’s time.
Nobody is going to seriously consider that business
because it is priced so far outside the realm of reason, but if I said ‘the
business is worth $220,000’ and the sellers said ‘let’s asked $249,000’ and
I’ll have room to negotiate, then that
was perfectly reasonable.
You have to know that when you're looking at
businesses that priced for sale with a broker, those are asking prices, they are not the result of some kind of
business valuation.
Beware though, there are people out there that call
themselves business brokers who will basically take any listing that is offered
to them at whatever price the seller wants to ask for.
They’ll put it out there in the world and hope to
sell it. What’s unfortunate is that
people end up wasting a lot of time with
these types of people because ultimately an overpriced business can’t create a
positive cash flow and nobody would be able to buy it.
If
you’re going to buy a business or you’re going to sell a business and you want
to find an experienced, qualified business broker who has proper training and
who uses proper methodologies, one of the things to look for is membership in
the IBBA (International Business Broker Association) or one of the larger business brokerage
franchise names.
They have
their own training programs internally that are also very good. You want to
look for someone who's a part of those organizations, who has had access to
training and you want to talk with them a little bit about how they do the
evaluation. You want to hear that they
compare businesses by industry and size to other similar businesses that have
already been sold.
This is called
the direct market data method.
Don’t try to
hire a business broker to do an evaluation on a business he has for sale, it
creates a conflict and he’ll probably just ask you to make your best offer and
work things out in a negotiation.
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