We Both Want the Best Price for Your Business

Every seller has this conversation with their broker: What’s the top price we can list my business for? Most owners have a number in mind for what they want to walk away with. Then there’s the number that matches their wildest dreams. Part of my job is to help manage expectations and keep things real.

Valuing a business is as much art as it is science. The company’s financials are the true bottom line; most brokers use EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) or the Seller’s Discretionary Earnings (SDE) as the basis for a valuation. Comparables – companies in the industry with similar size and revenues that have sold recently – will also give a broker an idea of what buyers are currently willing to pay. 

Depending on price, being able to secure financing is imperative to getting a company sold. One of the most valuable assets a business broker brings to any deal is their relationships with lenders. Your broker will know how to match a deal with a lender based on the lender’s knowledge and experience with the industry, the size of the deal, and the lender’s appetite for risk.

A seller needs to understand whether the deal is viable for a lender. The answer is rarely a simple yes or no. Sometimes, it’s a yes with conditions; the seller has to hold a larger note, for example. Sometimes, it’s “no at that price, but probably yes at this price.” 

I pay close attention to debt service ratios. If the business loan payments add up to, say, $100,000 a year, many lenders will require the business to guarantee 10 – 20% more  than that amount to ensure there’s enough cash flow to service the debt. Above that, there needs to be enough income to finance the new owner’s lifestyle, plus some operating cash. All these factors go into a lender’s decision whether or not to finance a deal.

There are other variables that might make a company more valuable: proprietary technology or intellectual property, contracts that guarantee a future revenue stream, or a barrier to entry into the industry that would cost a buyer a lot of time or resources to acquire on their own. In those cases, buyers are willing to pay a premium.

I present the information and a range of pricing I think is reasonable, but in the end, it’s the seller’s decision. Often, they’ll say, “Let’s test the high end of the market. We can always lower the price if we’re not getting any interest.” And I agree. After all, our interests are aligned; when the seller gets a higher price, I also earn more. The only exception is when the seller insists on setting a price I know is not justified based on the numbers. Overpricing a business just wastes everybody’s time. Smart buyers will pass; inexperienced buyers will just take up time and resources only to drop out of the running anyway when the financing falls through. 

I’ll check in with the seller regularly to report the activity we’ve seen on the listing. After a couple of months, if there’s no meaningful activity, we can make a pricing adjustment. 

If the business is large enough, we can even take a company to market without an asking price. We’ll list the relevant financial data (EBITDA and revenue) and ask buyers to make an offer. A strategic buyer or private equity firm might find the company a great fit for their existing business or portfolio, and we may get an offer that exceeds our expectations.  

An experienced broker looks for reasons to price a company as high as possible as long as the financial data can be justified. But in the end, it’s the market that will decide what a company is worth. When informed and qualified buyers start competing to make a deal, we’ll know we’ve gotten the best price for the business.

If you’re exploring the options to sell your company, the first step is to ask us for a complimentary opinion of value.