Value is one thing. Price is a different thing.
We appraise every business we list so that the owner knows the “most probable selling price”. Often we will take the opportunity to market at a higher price to allow for a “premium buyer” or negotiations.
Many businesses we sell settle at more, or less, than the appraised value. This may result from the different motivations and negotiating skills of the parties. A seller compelled to sell urgently through illness may not maximize the price received because we are unable to carry out a full marketing program.
Conversely, a buyer may pay top price because the business offers special benefits for that particular buyer, e.g. location.
Apart from motivations and negotiating skills the deal structure can greatly influence price.
Finance – an old saying is “you can name the price, if I can name the terms”. With banks still not crazy about lending for business purchases on reasonable terms and conditions, we are finding vendor finance more common than in the past. This can be a win-win for the parties.
The buyer can secure a larger business, and the seller can receive a better return by investing in something he/she knows.
Earn-outs have become increasingly common in some sectors. With these, part of the purchase price is withheld for a period of time subject to certain sales or profit targets being met.
Employment, or on-going consultancy can also affect price. A business owner may wish to “cash out” but be happy to continue working for the new owner on a part-time or full-time basis, or provide consultancy services. These arrangements can provide security for the new owner (e.g. retaining relationships) plus cash flow and employment for the exiting party.
A well-thought out deal structure can benefit everyone – maximizing price for the seller, minimizing risk for the purchaser, and rewarding the business broker for a successful transaction.