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Valuing A Florida Business For Sale Should Never Be A Guess

March 22, 2013

It is very common for a buyer and seller to have a huge difference of opinion when it comes to valuing a business.

Looking to buy a business in Florida? It would be wonderful of course if there were set prices for various businesses just like a buying a donut at a retail store, but there are not, and there never will be; so trying to make valuations a homogeneous exercise is a complete waste of time. That is why we so staunchly opposed to any “rule of thumb” theories. Since their very foundation is nothing more than a benchmark, they do more harm than good in trying to get a buyer and seller aligned on the purchase price.

That aside, they (Rules of Thumb) can play a role but that is specifically limited to allowing a buyer or seller weigh in additional theories when compiling a valuation, but enough on that point.

The fact is that getting a buyer and seller to agree on a price is a challenge, and it is mostly a result of both sides being poorly informed. A seller who takes their business to market without an intermediary uses establishes an asking price based solely upon what he or she believes the business is worth, or worse, based upon how much they may need to either retire, or enter a new venture, etc. These are by far the most dangerous scenarios simply because there is no logic whatsoever behind their asking price.

On the buy-side, the challenges can be more daunting. Very few active buyers have any experience whatsoever in the valuation process and so they are looking at arbitrary asking prices, or trying to compile their own valuations with zero experience. Talk about the “blind leading the blind”.

From a buyer’s perspective, the one thing that should be tabled early on when discussing the valuation with a seller is to find out exactly how the seller arrived at their valuation. There is no reason to go around in endless circles trying to find common ground if the parties are light years apart. Sometimes there is no common point where the parties can agree. However, by determining the rationale behind a seller’s valuation early on, a buyer can, at the very least, provide counter-points to the asking price. Often, there is no rationale, but this way you can know what you are dealing with.

Since a buyer cannot defer to the seller to determine the price, they (the buyer) must approach a business valuation with highly focused logic. It is useless to table offers without being able to provide a meaningful explanation for how your price was determined. This is especially important in cases where a seller’s price has been “plucked out of the air”. A buyer must clearly outline the background to their valuation, why it makes sense in light of the financials, the industry, the competition, the business threats, possible capital expenditures, sustainability of the business, and the necessary and acceptable return on their investment.

There’s an old adage that a business is worth what a buyer is willing to pay and what a seller is willing to accept. True enough, but that is a tad altruistic in our opinion, and may oversimplify what is involved.

Of course, all this is moot if or when a buyer is willing pay the seller full asking price and terms for their business. However, that is rarely the case, and it is more likely that a buyer’s offer will be “insulting” to a seller, at least initially. We have never been bothered about the idea of “insulting” a seller with any offer that is way below their price or expectations – they get over it. But if you are going to offend them with an offer, you must at least have concrete data to back up your theory.
 
Let us help you in buying your new business for the right price. View our listings below: www.FLORIDABusinessOpportunities.com

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