When business owners come to us to discuss selling their business, one of the first questions they ask us is "How much do you think I can get for my business?"

Our answer is usually something like "It depends on how much work you want to put into making your business ready for sale."

It seems simple, but the business owner who waits until they hit burnout stage with their business, and then needs to exit immediately, almost always winds up selling their business for less than they could with proper planning.

Valuing Private Businesses

Unlike public companies, whose selling price is constantly being determined by public securities markets, private companies have a lot more uncertainty in setting the proper price.

Private companies are valued fairly similar to real estate – your company is worth what a buyer is willing to spend on it. Again, that seems too simple to be worth mentioning, but you would be amazed at how many business owners overlook this simple truth.

The ultimate selling price of a privately held business is often strongly affected by the “value worlds” of both the Seller and the Buyer.

Seller Value Worlds

How much does the Owner of a private business want in exchange for selling their business?

The most money they can get, right? Not so fast.

What if a Business Owner will be selling their business to their children, after a lengthy apprenticeship period? It's likely that family businesses sell for less than they would if the business were sold to outsiders.

What if the Owner wants to sell his business to his Employees and Managers, through an Employee Stock Ownership Plan (ESOP). Again, the Owner may sell for less than to a third party – because they may have an interest in rewarding these loyal employees, who can help ensure continuity and good relations with existing customers.

Buyer Value Worlds

Here's an exercise that we have asked many of our Business Owner clients to go through:

A & F: "I want you to think of your toughest competitor. The one with whom you daily struggle with for market dominance."

Client: "Oh yeah, it's XYZ firm. They are always trying to steal our customers and talk down our company."

A & F: "Would you ever think of selling your company to them?"

Client: "Them? No way. Not in a million years."

A & F: "Let me put this another way, if they were selling their business tomorrow, how much would you pay to get them out of the way?"

Client: "Wow, I'd pay a ton of money if I didn’t have to compete with them. My life would be so much easier."

A & F: "Exactly. Now assuming you want to sell your business as soon as possible, can you think of anyone else who would pay as much, just to see you ride off into retirement?"

Client: "Well, when you put it like that, maybe I would consider it."

Moral of the Story

The moral of this story is that there is more than one way to value a private business.

The IRS has their determining factors for Fair Market Value.

But their values are not the limit for how much you can get.

Selling to an outside party – especially your toughest competitor – may offer you the chance to sell your business for many times what the IRS says its worth.

The values of both the Buyer and Seller are as big a factor in the sale price of Private Businesses as any other factor.

We invite you to contact us to see how we might help you think through these important issues.