Price vs. Value When Selling Your Business
Value is one thing. Price is a different thing.
We appraise every business we list so that the owner knows the “most probable selling price”.
Business owners will settle at more, or less, than the appraised value. This may result from the different motivations and negotiating skills of the parties. As an example a seller compelled to sell urgently through illness may not maximize the price received due to the urgent need to close a deal.
Conversely, a buyer may pay top price because the business offers special benefits for that particular buyer, e.g. location.
Apart from motivations and negotiating skills the deal structure can greatly influence price.
Sellers and buyers need to remember you can’t separate the price from the terms… – an old saying is “you can name the price, if I can name the terms”. “I’ll give you $10M for your business… and pay you $20/mo.” Price could be right in the ballpark but the terms will not work.
Earn-outs have become increasingly common in some sectors. With these, part of the purchase price is withheld for a period of time subject to certain sales or profit targets being met.
Employment, or on-going consultancy can also affect price. A business owner may wish to “cash out” but be happy to continue working for the new owner on a part-time or full-time basis, or provide consultancy services. These arrangements can provide security for the new owner (e.g. retaining relationships) plus cashflow and employment for the exiting party.
A well-thought out deal structure can benefit everyone – maximizing price for the seller, minimizing risk for the purchaser… deals get done when they work well for both sides.