FAQ

Q: Should I list my business for sale with a Business Broker?

If you want to limit the ways you can sell your business, list with a broker. Most business buyers in the market do not deal with brokers because of the limited ways the transaction can be done. When a business is listed with a broker, the transaction must net some commission payable to the broker.

The figures on sales results vary, but anywhere between 10% and 20% of businesses listed with brokers actually sell. Selling a business is not like selling a house. There are lots of intangibles that cause the buyers to be careful not to put so much cash up front. Sellers need to be flexible with deal structures, and brokers cannot permit this flexibility, unless someone volunteers to pay the commission out of pocket.

Another issue when listing with a broker is the business valuation tends to be higher than what the market is willing to pay. If there are no offers from buyers in the first month, it is more than likely the business is overpriced.

Note that I do not want to say anything negative about brokers. Most are very hard working and professional. I am just stating my experience, and the experience of many other buyers in the mergers and acquisitions arena.

Q: What is my business worth? What should I price my business at?

Keep in mind that the market will ultimately make that determination. That means that the price is only what a willing and able buyer is willing to pay.

There are many ways to value a business. A company with low sales productivity could be valued based on the fair market value of its assets. If it has a good set of steady customers and a locally recognized name, those could add to the value as goodwill.

One shorthand way of valuing a business is by multiplying EBIT or EBITDA by a valuation multiple. First, for each industry, there is a market rate multiple based on the recent history of sales. Secondly, the multiple generally is on a sliding scale, increasing with the total revenue and profits of the business.

For example, consider a certain industry, like Vehicle Towing. The average multiple on $500K of EBITDA is 4.0. This means at $500K in EBITDA, the market value of the company is around $2MM. This multiple will tend to be less for smaller companies, and higher for larger companies. So if EBITDA is $250K, the multiple could be 3.0, and for $1MM in EBITDA, the multiple could be 5.5.

For larger companies, where there are more systems in place and fewer dependencies on any single individual, the risk is perceived as less, and thus the valuation multiple is higher.