In this article, Eric Gall, founder and licensed broker of Edison Business Advisors, discusses the importance of understanding a business’s value before signing a listing agreement with a business broker to sell a business and the six benefits it provides.
A business owner only has one opportunity to sell their business, and a thorough analysis of value prior to signing a listing agreement is a critical step. This ensures proper pricing and terms, fairness, and informed decision-making throughout the entire sales process.
Numerous business owners have contacted Eric after a business broker attempted to pressure them into signing a listing agreement to sell their business during their initial meeting. The listing agreement was pushed upon the business owner before the business broker performed a thorough analysis to determine a value and price. The business broker asked the business owner their annual revenue and the amount of income they put in their pocket in recent years and then quickly gave them an estimated value and price for their business. Eric has seen many of these quick valuations wildly inaccurate. As a former business owner who bought and sold businesses for himself and as a business broker who has assisted many business owners buy and sell their businesses, Eric cannot imagine signing a listing agreement before having a thorough analysis of value performed.
Below, Eric outlines six benefits a thorough analysis of value provides:
Understand Fair Market Value: A thorough analysis of value establishes a business’s fair market value. This analysis includes various factors, such as financial performance, quality of assets, market conditions, industry trends, how a business compares to similar businesses sold, and diversity of customers, products, and services.
Set a Realistic Asking Price: A thorough value analysis helps establish a realistic price. Overpricing a business will cause buyers to not consider it for purchase, while underpricing a business will leave money the business owner deserves on the table.
Negotiate from Strength: A thorough analysis of value allows a business owner to negotiate from a position of strength. They have a price backed by solid data and analysis. In some circumstances, a business owner may wish to share their value analysis with a buyer to increase the buyer’s confidence in the price.
Enhance Financial Planning: A thorough value analysis is a key element of financial planning. Understanding the business sale has contribution to a business owner’s overall financial plan is critical to understanding and establishing future investment strategies to support the next phase of their life. If an analysis of value is underestimated, a business owner’s future may be jeopardized.
Shorten Due Diligence: A thorough analysis of value that documents discretionary expenses can help expedite the due diligence process and build confidence with buyers. Providing this detail up-front demonstrates that a business owner understands their financial statements and gives buyers confidence in their past financial performance.
Help with Bank Financing: A thorough analysis of value is very helpful in obtaining a Small Business Administration (SBA) lender’s letter of pre-approval for a business. A pre-approval letter helps generate additional confidence in buyers that a business is priced appropriately.
In summary, Eric Gall explained why a thorough analysis of value is critical before signing a listing agreement with a business broker to ensure proper pricing and terms, fairness, and informed decision-making throughout the sales process. It establishes a solid foundation for determining fair market value and pricing, negotiating, financial planning, due diligence, financing. It contributes to the success of a transaction and achievement of a business owner’s post-sale objectives.
To learn more about Eric Gall, founder and licensed broker of Edison Business Advisors, click here.
To learn more about selling a business, visit Edison Business Advisors’ website
Published by: Holy Minoza
