20 Oct Tom’s Comments on “How Much Is My Business Worth?”
How Much Is My Business Worth?
By Bob Sweeney
The fact is that your business is worth whatever the most motivated buyer is willing to pay you at the time you are ready to sell. That’s where our matchmaking skills & database that has been developed over 20 years becomes very valuable. There is no set formula that all buyers adhere to. Never pay thousands of dollars for an appraisal unless you need it for legal purposes – divorce, estate matters, partnership dispute, etc. For a mere $200, our firm provides an opinion of value for those who are curious to know what their business is worth or are contemplating a sale. Buyers pay zero credence to the results of a full blown appraisal. Buyers have their own way of placing a value on your travel company.
Service industry multiples have always been between 2.5 to 5.5X EBITDA. (EBITDA = Earnings Before Interest, Taxes, Depreciation, and Amortization.) The higher the profit, the more the multiple rises. (i.e. $1M EBITDA = 5X multiple | $150K EBITDA = 2.5X multiple)
Buyers complete transactions because of synergies that exist. It will take them less than 2.5-5.5 years for payback. Buyers only pay for delivered earnings. Potential does not sell. Purchase price is determined by the seller’s previous 12 month financial performance.
The above was part of an article in Bob Sweeney’s newsletter. Bob is president of Innovative Travel, a very successful firm, based in Atlanta.
Tom West’ comments:
Bob’s article is right on target. I think many of today’s business brokers get so wrapped up in valuing the business that they overlook why the seller has hired them. They are hired by a seller to sell his or her business for the highest price possible, or the very best deal possible.
I still believe that if ten experienced business brokers “valued” the same business, the “values” would be wide apart. I know brokers who then wouldn’t list it unless the seller accepted the “value” created by the broker. Valuation is an art, not a science. And, if the broker is willing to accept a price that the seller wants, what percentage can it be over and above the value set by the broker – 10%, 15%, 20%? Experienced business brokers can tell the minute they hear the price and terms from a potential seller whether he or she is in the ballpark. It essentially is common sense. Forget the valuation: will a buyer pay the price the seller is asking to make the return that the seller is making.
My argument has always been that if a business nets $200,000 after debt service, and you can buy it for $100 down, do you really care what the full price is? Stupid, I agree, but you get the point. I have always said that business brokerage is a down-payment-driven business – especially in today’s market.
I’m not suggesting that one should take a listing with a ridiculous price, but if the seller is serious about selling, why not give it a try? As long as you service the seller on a regular basis and make a reasonable attempt to sell it, you can try to get the seller to live in the real world or you can give the listing back. When I was running an office and subsequently overseeing a lot of business brokerage offices, I could measure the success of an office by the number of listings and the number of listing amendments. The listing amendment is the key. It shows that the office is servicing the listings and getting the sellers to join the real world or price and terms.
We can tell from our surveys that the average number of listings in an office is almost half of what it used to be, and the time from listing to sale is way longer. (This is true despite the valuation approach. You would think the average time would now be shorter if the price is “right.”)
Sometimes I think the computer people and the number crunchers have taken control and forgotten or failed to realize that they have been hired to sell the business.