Should I get a Business Price Opinion?

It can be a good idea to consult a business broker on the price you might expect in the marketplace if you took your business out for sale. There are many reasons to do this, even if you aren’t ready to go to market. Sunbelt and True North M&A provide Business Price Opinions (BPOs) for:

• First, you should be assessing your overall wealth regularly. Your business may be the single biggest asset you own. It’s prudent to know its market value to plan and optimize your entire portfolio of financial, physical, and business assets.
• Second, you will probably be approached by a prospective buyer someday. They might be a competitor, an employee, or even a stranger. Your competitors will likely lowball you; they think they know everything about your business. Your employee is probably light on investable funds. The stranger, well, who knows. In any case, you want to know your reservation price.
• Third, but certainly not least, among the reasons to get an opinion on what your business should sell for is to plan for internal transactions, such as bringing on new owners, buying out existing partners, or incentivizing employees with ownership interests.

So What is a Business Price Opinion?

A BPO is a report on the opinion of a business broker of the most likely price at which a sale of the business would be accomplished in the marketplace for the sale of a business. It is based on a limited analysis of your financial results and on data on what other businesses have sold for.

To develop a Price Estimate for a specific business, our process is then:

1. Study the cash flows of the business.
2. Find observable market transactions for comparable companies and determine the multiples being paid.
3. Adjust the market multiples is necessary to account for particular strengths or weaknesses of the subject business.
4. Apply the adjusted multiples to the business’s cash flows to determine price.

When a Broker brings a business to market, it is a standard procedure to determine an appropriate price at which to go to the market. The best practice in the brokerage industry to determine that price is to find observations of the values realized in market transactions for similar businesses.

In the brokerage industry, this is known as the “comparable market transactions” method, which also describes one of several important methods certified business appraisers use. If we can observe the price paid in such transactions and the cash flows or earnings of the underlying business, we can express the price paid as a ratio of Price to the cash flow metric.

For example, suppose we observe a transaction where a $1 million purchase price was paid, and we see that the cash flow (often EBITDA or adjusted EBITDA), is $200,000. In that case, we say that the company traded at a multiple of 5 times cash flow:

$1,000,000 price = 5 x $200,000 Cash Flow

Suppose we observe a number of transactions that tend towards the same multiple, in a marketplace where both buyers and sellers can observe this information. In that case, we can be reasonably sure that a negotiated deal will occur very close to that multiple. This is because buyers will be reluctant to pay more than others for the same thing, while sellers will be reluctant to receive less.

We’ve all heard the old saying “a thing is only worth what someone will pay for it.” When it comes to actual transactions, that’s only half right. Because it is also axiomatic that “there are two sides to every trade.”

In other words, what someone is willing to pay only results in a transaction if you, the owner, will accept that buyer’s offer. So, a thing is worth what the buyer and seller agree meets both side’s wishes. In defining “fair market value”, valuation experts will add the phrase “both sides having the same information”.

A Business Price Opinion provides you with the opinion of a professional who sells businesses for a living and has observed hundreds of transactions where a price is agreed to by both parties. Email me, and we can discuss how to proceed with your Business Price Opinion.

Leonard Washko

Business Price Opinion Advisor

lwashko@tnma.com