Oh hey there guys its Dave Barnett from the investlocalbook.com blog site with another
reader question.
And this time it's from Phil and Phil asks can we trust business brokers' valuations
of business?
Now Phil wasn't more specific.
He didn't say if it was because he was going to buy or be selling a business, but why don't
we just talk about business valuations when it comes to brokers in general.
When I was a business broker people would come to me with their businesses and I would
evaluate them.
I would do what was called a most probable selling price evaluation, and I'm pretty good
at it and I still do them today for people who want to have a value put on a businesses
and generally my MPSP prices would come out within five or 10% of what the actual end
result selling price would be, so they were pretty accurate.
Now to get to Phil's question can you trust a business broker's valuation.
If the business broker is qualified and competent and knows what he is doing and has experienced
proper training and you hire the broker to evaluate a business then probably you're going
to get a pretty good accurate reading on what the business is worth.
If you go to a business broker and say show me businesses for sale and what are the asking
prices, that's not the same question at all.
Because what I would do is I would create the most probable selling price evaluation
for the seller and then I would recommend an asking price and because the sellers is
the owner of the business, ultimately it's up to them to set whatever asking price they
wish.
Now if I told someone there business is worth $220,000 and they said they wanted to ask
$500,000, I wouldn't take them on as a client.
I would tell them to try somebody else because if it's just so far out of whack to what is
reasonable, it is just going to be a waste of the broker's time.
Nobody is going to seriously consider that business because it is priced so far outside
the realm of reason, but if I said you know the business is worth $220,000 and the sellers
said well why don't we asked $249,000 and I give them room to negotiate that was perfectly
reasonable.
So you have to know that when you're looking at businesses that priced for sale with a
broker, those are asking price.
They are not the result of some kind of business valuation.
A business valuation probably played a large role in helping to guide that asking price.
Now, there are people out there and remember I qualified my statement by saying a competent
business broker that's been properly trained and has experience.
There are people out there that call themselves business brokers who will basically take any
listing that is offered to them at whatever price the seller wants to ask for and they'll
put it out there in the world and they think that their selling houses or something that
you can just put whatever price on that you wish and what's unfortunate is that people
end up wasting a lot of time with these types of people because you can go and look at that
business with the $500, 000 price tag and when you start to get into the need of the
numbers and everything, you quickly realize that you can't afford to buy at that price
the business' cash flow will never pay for itself but you may have wasted weeks of your
time meeting with the seller, talking with people, investigating people, learning about
the industry, etcetera.
So that problem does exist.
If you're going to buy a business or you're going to sell a business and you went to an
experienced qualified business broker who has proper training, who uses proper methodologies
and one of the things to look for is membership in the IBBA the International Business Broker
Association or one of the larger business brokerage names or franchise names.
They have their own training programs internally that are also very good.
You want to look for someone who's a part of those organizations, whose had access to
training and you want to talk with them a little bit about how they do the evaluation
and you want to hear that they compare businesses by industry and size to other similar businesses
that have already been sold okay.
It is called the direct market data method and we'll talk more in another video about
the ways that businesses are evaluated, but if you go to someone and say, I want to hire
you to evaluate this business I'm thinking of buying or selling and that's it, and you
pay them a fee for their opinion, you probably get a pretty good estimate of what the business
is worth, but if you're going to co-mingle getting their advice on value together with
them acting as a broker hoping to earn a commission from the sale of a business, they would be
conflicted in that case because they would have already done that project for the seller
before they met you.
Ultimately what a broker is going to say in a situation where you are challenging the
price is he is simply going to say that everything is negotiable and that you should make your
best offer and work with the seller to try to come to the combination that works with
the both for the both of you.
Anyway, thank you very much.
If you enjoy my videos in learning about buying and selling businesses and operating small
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