Phil’s question about trusting business broker valuations touches on a common concern in the buying and selling process. Here’s an overview of how valuations work in this context and what factors can influence their reliability. https://www.youtube.com/watch?v=NQACN_PRIjQ
The Role of a Business Broker’s Valuation
As a business broker, I’d often perform what’s called a “Most Probable Selling Price” (MPSP) evaluation. This assessment closely estimates the actual selling price, usually accurate within 5-10% of the final sale. Brokers use industry benchmarks and past sales data to inform this analysis. If the broker is well-trained and experienced, they are likely to provide a fair and realistic estimate. However, it’s critical to note that this estimate is not a final price tag; it’s a guiding figure to help set the asking price.
Asking Price vs. Actual Valuation
An important distinction in business sales is between valuation and asking price. A valuation is an objective analysis of a business’s worth, while the asking price is set by the seller. For example, if an MPSP analysis shows a business is worth $220,000, a seller might choose an asking price of $249,000 to allow room for negotiation, which is reasonable. But if the seller sets an asking price at $500,000, it’s likely beyond reasonable market value. Some brokers may list businesses at any price requested by the seller, leading to wasted time for potential buyers investigating overpriced listings.
Choosing the Right Business Broker
If you’re a seller and selecting a broker, look for membership in credible organizations like the International Business Brokers Association (IBBA), which indicates a commitment to ethical standards and proven methodologies. Brokers who follow the direct market data method, comparing similar sales in the same industry, typically offer more reliable valuations. However, if a broker acts on both valuation and sales, there may be a conflict of interest, especially if they’re driven by commission incentives. To mitigate this, some buyers hire independent valuation professionals to get an unbiased view. My team and I do these valuations for sellers all the time and you can learn more about it at www.HowToSellMyOwnBusiness.com
The Takeaway
If you’re considering buying or selling a business, a knowledgeable, trained broker can give you a realistic sense of value—just be cautious about conflating the asking price with actual worth. Be prepared to negotiate and remember that all deals are flexible, with the potential for compromise that works for both buyer and seller.
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Cheers!
Dave
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