The biggest mistake when valuing a business is using for sale comps rather than sold comps to determine industry multiples.
This is a big issue in the industry. Even some “experienced” business brokers use the for sale comps to determine business valuations.
The problem with using for sale comps is that they are not what businesses actually sell for. Additionally, who knows who is listing a business. For all we know it is someone without any experience or a seller who thinks their business is worth more than what it really is worth.
So why use those examples if you truly want to sell your business? Only a small percentage of the for sale businesses actually sell. The reason most of these businesses are not selling is because they are either poorly marketed or incorrectly priced. To be successful at selling your business, you have to make sure you get your valuation correct. That being said, it doesn’t mean you have to list for that price.
When figuring out a listing price, we consider multiple variables such as seller’s time frame, desired sales price, and other business related tangibles. If a seller is not in a rush to sell the business, we try to maximize the sales price for the seller by listing higher than the industry multiple.
We then use the data and analytics available to us to determine if the business is receiving any traction. If we have hundreds of views and tons of inquiries, then we know the business is in high demand and we are priced to low. In that case, we remove the listing and re-brand it and list it at a higher price. If the opposite occurs and there is no traction for a period of time, we then know that the price is too high. We then can simply lower the price until we receive the desired amount of views and inquiries.
When selling or valuing a business nothing should be set stone.
It is important to stay flexible and give yourself time when selling a business. If you have time, you can truly maximize your sales price by taking the approach described above. Also, you may have to re-brand your marketing. Sometimes, your business listing may need a new look. Or be described in a different way to get more inquiries.
So staying flexible and knowing what your business is truly worth is key to success.
Talk with one of our local Texas Business Broker today to get your valuation. It is completely free!
Please contact us if you have any questions or want to learn more. – Wishing you the best, Alex Khabbaz, Managing Partner and Austin Business Broker for Texas Business Brokers.