Is this how YOUR business broker values businesses?
For many businesses, a business broker is the first port of call to get an idea of how much their business is worth. That's not necessarily the best place to start.
There are three reasons:
- Brokers are generally not qualified valuers and this is not their area of expertise;
- They have incentive to over-value businesses in order to get your instructions;
- The only valuations worth anything are those made by people who have the money and intent to buy your business.
Free Business Valuations
Most business brokers will provide a free valuation for your business. Just like estate agents will give you a free valuation on your house.
But there's a difference. You can get a rough idea of whether the estate agent's figure is reasonable by examining how much other houses in your street have sold for recently.
Not so with businesses.
There is no national registry tracking business sales and there is no record of the prices individual businesses obtained in the market. And these figures are impossible to work out from published accounts.
Why The Free Business Valuation Is Worthless
You have no way of verifying whether the broker is anywhere near right. And most brokers talk a good game, explaining that their many years of experience gives them the ability to predict value with a high degree of accuracy.
Not necessarily true!
They may justify their figure with some industry statistics on "going multiples" or some jargon on Net Present Values and Discounted Cash Flow methods for calculating the worth of a business.
That's a lot of bunkum.
They could be out by 10%, out by 50%, out by 90% or out of the ballpark. And they usually are. That's why they'll make no guarantees about you achieving that price. The closest they'll come to a guarantee is the no-sale-no-fee deal i.e. "we are so confident that we can get you this price that we'll charge you nothing till the business is actually sold".
This is a trap as explained here!
Besides, buyers and investors are hardly going to rely on a valuation done by your agent. If the valuation is of no use to you in deciding asking price ... and no use to the buyer as a guide of what to pay, no real purpose is served by this valuation.
Another Reason Why The Free Valuation Is Meaningless
But there's another reason why any figure the broker gives you is not worth the paper it's written on, and to demonstrate I offer to buy your business for double whatever the valuation figure you currently have.
Read our other articles on business valuation here.