Defending Your Price

/in /by Don Ross
A critical component in any business transaction, whether it be a simple sale of a used car or a complex transfer of ownership of a business, is usually PRICE. The art of “the deal” is dependent upon the two parties arriving at a price they can both live with.  In both cases, each party must persuasively defend their price.
Market valuations are often based upon a multiple of past and future earnings. Multiples usually fall within a market-tested range for a particular type of business. Many factors influence the multiple and ultimately the price that both parties will accept for a specific business. Here are several common factors:
  1. The nature of the owner’s involvement.  Can the owner easily be replaced or is the business a “one trick pony”?  In cases where the owner IS the business, the indispensability will negatively influence the future performance of business and the fair market price. The same holds true for the staff that may or may not be transferring with the change of ownership.  Are there certain key employees that would be a challenge to replace?
  2. Consistency of Performance.  Does the business have consistent monthly revenue and cost margins or are there seasonal peaks and valleys where negative cash flows obligate the owner to take on large lines of credit?
  3. Processes in Place.  Does the business have a time tested modus operandi that can easily transfer to a new owner and staff?  Intuitive management and loose organization may have served the present owner well but it doesn’t transfer well.
  4. Client and Supplier Concentration.  Limited sources of supply or a small client base can be problematical.  When you have all of your eggs in one or two baskets, you really have to watch those baskets.
  5. Capital Expenditures.  Businesses that generate a lot of revenue and profits with minimal capital assets requirements sell for higher multiples.  Conversely, businesses that have consistently high outlays for new equipment, rolling stock, and other capital assets, sell for lower multiples.  Take a close look at the depreciation schedules to determine the future ‘life expectancy” of the assets and the costs to replace them.
  6. Regulations.  Businesses that require new licensing, background checks, certifications, prior industry experience can present a hurdle to a new owner.
Just as in selling/purchasing a used car, once you have consulted the “Kelly Blue Book” and arrived at a price range, further examination into the drivers of value and risk of the business will serve you well when it comes time to defend your price.