I have been contacted by numerous business owners after a business broker attempted to pressure them into signing a listing agreement to sell their business during their initial meeting. The listing agreement was pushed upon the business owner prior to the business broker performing a thorough analysis to determine an opinion of value. The business broker asked the business owner their annual revenue and the amount of income they put in their pocket in recent years and then quickly gave them an estimated opinion of value and price for their business. I have seen many of these quick opinions of value wildly inaccurate.
A business owner only has one opportunity to sell their business and a thorough opinion of value is a critical step. It is important to have a business broker complete a thorough opinion of value prior to signing a listing agreement to ensure proper pricing and terms, fairness, and informed decision-making throughout the entire process.
As a former business owner who bought and sold businesses for myself and as a business broker who has assisted many business owners buy and sell their businesses, I cannot imagine signing a listing agreement prior to having a thorough opinion of value.
This article will discuss why it is important to obtain a thorough opinion of value from a business broker prior to signing a listing agreement to sell a business. A thorough opinion of value will help to:
1. Understand Fair Market Value: A thorough opinion of value establishes a fair market value for a business. A thorough analysis evaluates various factors, such as financial performance, quality of assets, market conditions, industry trends, how a business compares to similar businesses sold, and diversity of customers, products, and services.
2. Set a Realistic Asking Price: A thorough opinion of value helps establish a realistic asking price. Overpricing a business will cause buyers to not consider that business for purchase. Underpricing a business will leave money the business owner deserves on the table.
3. Negotiate from Strength: A thorough opinion of value gives a business owner the ability to negotiate from a position of strength. They have a price backed by solid data and analysis. In some circumstances, a business owner may wish to share their opinion of value with a buyer to increase the buyer’s confidence in the price.
4. Enhance Financial Planning: A thorough opinion of value is a key element of financial planning. Understanding the contribution the business sale has to a business owner’s overall financial plan is critical to understanding and establishing future investment strategies to support the next phase of their life. If an opinion of value is underestimated, a business owner’s future may be jeopardized.
5. Shorten Due Diligence: A thorough opinion of value that clearly documents discretionary expenses can help expedite the due diligence process and build confidence with buyers. Providing this detail up-front demonstrates a business owner understands their financial statements and gives buyers confidence in the business’s past financial performance.
6. Help with Bank Financing: A thorough opinion of value is very helpful in obtaining a Small Business Administration (SBA) lender’s letter of pre-approval for a business. A pre-approval letter helps generate additional confidence in buyers that a business is priced appropriately.
In summary, a thorough opinion of value is a critical step to ensure proper pricing and terms, fairness, and informed decision-making prior to signing a listing agreement with a business broker. It establishes a solid foundation for determining fair market value and pricing, negotiating, financial planning, due diligence, financing, and contributes to the success of a transaction and the achievement of a business owner’s post-sale dreams.
I hope this article has been helpful. If you are considering selling your business, please contact Edison Business Advisors. We are happy to discuss your specific situation and how we can help you achieve your goals.