How to value a business?

I can fully appreciate how business owners want to get the best price for their business when they want to sell.  After all, it is often the second highest transaction, in terms of value, they will have in their life, behind selling their house.

What I find strange is when selling a business, owners often loose their business acumen.  Let me explain.

In the UK there are business transfer agents who “buy a listing”.  And what I mean by that is to over value a business in the hope that the owner will instruct them.  Small businesses simply do not sell for 3.5/4 times profit in the UK, however owners are fooled time and time again into instructing the agent who tells them it is worth the highest figure.

I will not mention any names however if anyone would like to make comments they are welcome to do so.  Needless to say these agents are the ones with glossy marketing material and, here is the punchline, want a large upfront fee before they will take the business on their books.

Amazingly, business owners pay this fee often over £1,000 again and again.  The irony is that this money pays for the glossy material that fooled them, and it also means that the agency is making enough money so that they do not actually have to sell the business they have just been instructed to sell.

The fact is small businesses are valued at around 1 and 2 times profits depending on the individual circumstances of that business. 

And when the owner is desperate to sell because they have wasted 2 years of their life with this agent, they reduce the price dramatically down, incidently to either the market value or even below.

So if you are a business owner wanting to sell your business, keep your business acumen, and learn your businesses value before you instruct an agent, you could save yourself a lot of pain and money. 

This entry was posted on 30/01/2007 at 06:47 pm and is filed under Business transfer agents. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or trackback from your own site.