Question:
I am interested in buying a business, but the seller is looking for a valuation that is more than three times the average earnings multiple for his industry. How can I convince him that he is simply asking too much? He has listed the business himself and there are no attorneys or business brokers involved in the deal.
Answer:
This is a perfect example of why
a seller should engage a competent business broker to assist them with the sale of their business!
A broker would provide him with the education needed to effectively market the business. Since that is not the case, it’s up to you although you should realize that you may not be able to convince him that he is simply asking too much.
If this seller is not motivated to sell the business, then it really doesn’t matter what you say or do, there’s no deal here.
Has the seller identified how he actually established the price? Did he have a professional appraisal done or has he simply priced it based on what he thinks it is worth or what he wants to get from the sale? Chances are it’s a shot in the dark valuation and so
the first step is to understand his logic and possibly suggest a professional valuation by a Certified Business Appraiser.
It’s possible that the seller may not want to have an appraisal done so
you should provide him with some industry statistics of comparable businesses that were sold so he begins to understand the marketplace.
You should also have your CPA compile a valuation based upon the financials presented to you at a multiple that is in line with the industry and what you feel the business is worth.
If you truly believe that he wants to sell the business, then he will have to demonstrate some flexibility on the price and/or terms.
I would recommend that you compile your data and present it to him. Then, you may even want to present an offer to him at your valuation.