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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.