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Buying a business..best way to start bartering price

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luvbusiness

Here is my question .

For a buyer which would be me... is it best to start off by saying to the seller "ok tell me the lowest you would accept".Or should I come out with a price first obviously a low starting point.

So for example a business priced at £100,000.MY opening offer could be £80,000 or do I say to seller what do you think its really worth.

Thanks for any ideas
 
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luvbusiness said:
Here is my question .

For a buyer which would be me... is it best to start off by saying to the seller "ok tell me the lowest you would accept".Or should I come out with a price first obviously a low starting point.

So for example a business priced at £100,000.MY opening offer could be £80,000 or do I say to seller what do you think its really worth.

Thanks for any ideas
Click to expand...

I would look at valuing the business in an entirely different way. If you just offer 80% of the asking price, it is rewarding somebody for plucking a figure out of thin air. Remember that when buying/valuing any business, you are buying a stream of future incomes- regardless of whether it is a shop, a consultancy, a manufacturer etc.

There are a number of models, some more approprate than others. There will be a standardish multiple of nett profit for the industry. You need to check that the nett profit is accurate- is it inflated due to no maintenance of machinery etc. If so, you need to make an adjustment.

You could also look for changes that you could make to the business, which would affect the nett profit. For example, if you could see that you could make efficiency savings, it is worth looking at how this could effect your valuation. Likewise, if there are streams to the business that you do not want, then value those appropriately.

Are there any synergies that you could bring from another business? If you are expanding, this could help you to get a valuation closer to the asking price, compared with somebody who has no synergies. For example, could the first business be ran from the same premises as the new one, thereby saving rent.

An alternative approach is to look at the assets of the business, and adjust for those which you do not want, for example has the MD got a sportscar sat on the books? This will give a much lower valuation, but gives you an idea that goodwill has been valued at, and another negotiating point.

The final sale price is likely to give a value somewhere between the asking price, and the figures you calculate. You would hope that the seller of the business has done similar exercises in order to value the company, so you can have a sensible discussion around the numbers. To return to my original point, you are buying a stream of future incomes. Taking away any emotions, there is a price at which this is attractive, and above which it is not. You should be able to be reasonably open with a seller about this- and shows how different businesses can make widly different offers for acquisitions, some of which dont seem to pay for the other bidders.

I hope that this helps
Mark
 
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Mark,Thats certainly one approach to consider.The other is to establish what it is worth to the potential buyer.It's only worth what a buyer will pay for it,isn't it?
 
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vvaannmmaann said:
Mark,Thats certainly one approach to consider.The other is to establish what it is worth to the potential buyer.It's only worth what a buyer will pay for it,isn't it?
Click to expand...

I agree, but it is establishing what it is worth to the potential buyer that is difficult.

Take dragons den, and the number of £1M valuations. Offering 80% of that would still be way over the top. I know that it is different, but demonstrates the issue.

IMO, my post describes at least a couple of ways of coming up with what the buyer should pay for it. There are no doubt countless others.
 
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I would be more inclined to see what the turnover and more importantly what the profit is so I can at least get an idea of my ROI.

Business 1 for sale 100k 5k mth profit
Business 2 for sale 100k 2k mth profit

Which am I going to go in and take the p!ss and offer half the 100k asking price and which one is going to get offered 80%

And make sure you look at the books the very least 4-6mths of trading see if they are selling due to other reasons that they will never tell you, customer decline, increase in materials, laws that will be introduced etc etc.

Never ask the seller what they thinks it worth. They will say 100k
 
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solopreneur said:
I would look at valuing the business in an entirely different way. If you just offer 80% of the asking price, it is rewarding somebody for plucking a figure out of thin air. Remember that when buying/valuing any business, you are buying a stream of future incomes- regardless of whether it is a shop, a consultancy, a manufacturer etc.

There are a number of models, some more approprate than others. There will be a standardish multiple of nett profit for the industry. You need to check that the nett profit is accurate- is it inflated due to no maintenance of machinery etc. If so, you need to make an adjustment.

You could also look for changes that you could make to the business, which would affect the nett profit. For example, if you could see that you could make efficiency savings, it is worth looking at how this could effect your valuation. Likewise, if there are streams to the business that you do not want, then value those appropriately.

Are there any synergies that you could bring from another business? If you are expanding, this could help you to get a valuation closer to the asking price, compared with somebody who has no synergies. For example, could the first business be ran from the same premises as the new one, thereby saving rent.

An alternative approach is to look at the assets of the business, and adjust for those which you do not want, for example has the MD got a sportscar sat on the books? This will give a much lower valuation, but gives you an idea that goodwill has been valued at, and another negotiating point.

The final sale price is likely to give a value somewhere between the asking price, and the figures you calculate. You would hope that the seller of the business has done similar exercises in order to value the company, so you can have a sensible discussion around the numbers. To return to my original point, you are buying a stream of future incomes. Taking away any emotions, there is a price at which this is attractive, and above which it is not. You should be able to be reasonably open with a seller about this- and shows how different businesses can make widly different offers for acquisitions, some of which dont seem to pay for the other bidders.

I hope that this helps
Mark
Click to expand...

I am currently selling my business and I wish the people that had enquired and then wasted my time, would have followed at least some of the above points, before sending me insults rather than sensible offers.
 
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Someone got in touch with me about selling their website business which has all but ceased trading.

Asked about profits, turnover, statistical analysis but they were coy saying it made lots of money a few years ago but now... blah blah blah

No price was quoted and I certainly wasn't going to start the ball rolling so left it in a quandary.

How do I value it. Has a couple of thousand stock - obviously all but a handful of rubbish that hasn't sold and likely never will so one could argue no stock.

Given it's been on backburner for a year SERPs have tumbled although it still holds some valued keywords in high placings and longevity of domain would be useful plus there's the CMS and actual website.

So same position as luvbusiness - perhaps we should offer a £1 just to start an auction.
 
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Negotiating is a lot easier once you have read this book:

Getting to Yes: Negotiating Agreement Without Giving In by Fisher, Ury, & Patton.

You will learn how to work out your BATNA (best alternative to a negotiated agreement).

Imagine this:

I agree to by your car for £1,000 cash.
I turn up, the car is as described so I start counting out the cash.

I count out £950 then go through my pockets and find another tenner, then I get out £13 in change, then I find another couple of fivers, so I have put £983 in your hand but I can't find any more cash. I bet you would let me have the car even though I am £17 short.

But the book points out at what point is the offer unacceptable? What if I said Oh that leaves me without enough to buy petrol can I have a tenner back? Do you say no? or give me the tenner? What if I asked for £20?
at some point you will say no but where is that point?

Getting to Yes says set your BATNA in your head, for example we agreed a grand for your car and your BATNA is £990 then you walk away even if I offer you 1p less. You are the one with the power than not me.
 
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Most small to medium sized businesses end up be sold at around 75% of the asking price, some reach the asking price and a very small amount get more than the asking price ( due to multiple buyers being interested)

I have purchased several over the years and have yet to pay more than 75% and have paid as low 25% of the asking price.

The reality is the price that is paid has to reflect what the business has produced in the past , what it is doing today, and what it is likely to do in the future. Then you have to factor in the owners wants and desires/needs and the buyers wants and desires.

There are many, many ways of coming up with values and different methods are suitable for different types of business, but it always comes down to what someone is willing to pay and what someone is willing to except.

In my experience of looking at the accounts of at least 5 businesses a month the vast majority are overvalued significantly.

However , to go in with a pitch of £80k on a £100k business is just daft unless you have extensive research into the business and the numbers in order to justify why you are pitching at that level.

You could also be blowing a lot of money as they business may be worth significantly less.
 
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adventurelife said:
Most small to medium sized businesses end up be sold at around 75% of the asking price, some reach the asking price and a very small amount get more than the asking price ( due to multiple buyers being interested)

I have purchased several over the years and have yet to pay more than 75% and have paid as low 25% of the asking price.

The reality is the price that is paid has to reflect what the business has produced in the past , what it is doing today, and what it is likely to do in the future. Then you have to factor in the owners wants and desires/needs and the buyers wants and desires.

There are many, many ways of coming up with values and different methods are suitable for different types of business, but it always comes down to what someone is willing to pay and what someone is willing to except.

In my experience of looking at the accounts of at least 5 businesses a month the vast majority are overvalued significantly.

However , to go in with a pitch of £80k on a £100k business is just daft unless you have extensive research into the business and the numbers in order to justify why you are pitching at that level.

You could also be blowing a lot of money as they business may be worth significantly less.
Click to expand...

I agree with what you say about some businesses being overvalued.Ive been looking around at different businesses,newsagents,fish and chips and post offices and cant see how they have come to the valuation to what the business gives you for profit return.Because ive mostly been looking at freehold businesses I think a lot of the problem is because property prices have risen so fast so the quoted price of the business has gone up considerably but the actual money generating part of the business has hardly moved.

You think then a pitch of 80k for a business value of 100k is too high then..you would actually come in lower?
 
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luvbusiness said:
You think then a pitch of 80k for a business value of 100k is too high then..you would actually come in lower?
Click to expand...

I think you are missing the point. None of us can possibly know without seeing the company accounts. It simply depends on how long it would take for you to see a return on your investment.

Maybe it makes £75k a year and the seller wants a quick sale at £100k. Or maybe it makes £10k a year and the seller is taking the piss.
 
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One minor but important point - unless you intend to offer to exchange their business for your chickens (or car, or house), you won't at any point be bartering.
 
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Mark summarises the issues well. I concur that you are buying the future net revenue stream of the business. Your starting point should not be the offer price, though if you progress to negotiations, you will obviously have to take this into account.

The starting point is what you realistically see as the point at which you see a return on your investment. Although many of the business buyers buyers we see use various valuation methods, the one that I always use personally in purchasing businesses is the discounted cash flow (DCF) method. I am quite aggressive in the return I want to see when I buy a business, i.e. at least 20 per cent. That's because of the obvious inherent risk factors. DCF is a relatively a complicated formula for the uninitiated, but worth investigating with your accountant nevertheless.

Basically it discounts the future cash flows of the business by the required rate of return (in my case 20 per cent) to give you a present value of that future revenue stream.

Once you have this figure in mind you are better prepared to examine the vendor's selling price and negotiate accordingly.

It was a tiny deal, but one of my clients wanted to buy some IP assets off a business last week. The business wanted £55,000. My client wanted to go in at 75 percent. I looked at what it would return for her over the next 4 years. I then told her not to offer over £15,000 based on the DCF of the assets. I put in an offer obo the client of £11k along with a rationale to the vendor, and it was accepted on Friday with no negotiation required. Needless to say she went off on hols today pleased as punch. A simple illustration of why the buyer's own valuation should be the starting point.

Fact: only 22 per cent of business put up for sale in the UK sell at all in the following two years. I have 15 years of evidence that vendors nearly always put far too high a price on their precious business.
 
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jim_gold said:
Fact: only 22 per cent of business put up for sale in the UK sell at all in the following two years. I have 15 years of evidence that vendors nearly always put far too high a price on their precious business.
Click to expand...

Hi Jim

It the above based on your brokers numbers or across all brokers?

I was not aware it was so low, I thought it was nearer 50% but if it is that low more ammunition ;) cheers.
 
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Good point Mark.. Look at models for this, don't do it by the ear.. Hire a consultant in mergers and acquisitions if you feel like it, maybe just for a few hours to get to understand the mechanism a bit better.
 
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You could ask another business transfer agent to carry out a valuation for you.

The issue with a lot of business owners is that they choose a business transfer agent who will tell them what they want to hear rather than the truth.

So they end up putting their business on the market at far too high a price and not selling it. Perhaps Jim has a number of these businesses on his website hence his experience. I like to be more realistic and be truthful after all I only make money out of selling a business so my success rate in selling is much higher.

Bascially if you do not want to pay another business transfer agent you need to look at comparables and also the particular business owners circumstances.

Unfortunately some business owner try and sell their business when they need to sell, perhaps you might get a deal with these owners, however with a planned sale you will be highly unlikely to get a business at 75% of asking.
 
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I would start by asking them to provide the data in support of their £100K valuation, and also why they are seeking to sell, any timescales that may be key for them, etc ... get as much info as possible before working out how much to offer

Once you have all of the data, including audited accounts, look for all the risks/downsides, use these to argue a more favourable price for yourself.
 
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gordano said:
I would start by asking them to provide the data in support of their £100K valuation, and also why they are seeking to sell, any timescales that may be key for them, etc ... get as much info as possible before working out how much to offer

Once you have all of the data, including audited accounts, look for all the risks/downsides, use these to argue a more favourable price for yourself.
Click to expand...

Its less than likely that the business he is buying would have audtied accounts.
 
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adventurelife said:
Hi Jim

It the above based on your brokers numbers or across all brokers?

I was not aware it was so low, I thought it was nearer 50% but if it is that low more ammunition ;) cheers.
Click to expand...

Hi adventurelife,

This was based on research we carried out in 2009, looking at around 300 companies that were first listed with the Business Sale Report between 12 months and 24 months earlier. We tried to ensure that we included a fair cross section of industries from around the UK.

About 65-70 percent of the businesses were originally listed by business brokers, and although not all the country's brokers were included, we had businesses included in the research supplied by nearly all the leading business brokers.
 
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The rationale I've used in the past is this;

1. Work out what you think the real value of the assets are, i.e. what you could sell them for.
2. Work out a multiple of earnings. If the business has a long track record and sticky customers I might look at a max of three years earnings. If there was any possibility of someone setting up against you across the road maybe one year.
3. Add the two together and make an offer but show the vendor why you've come up with the number you have. If they think it's low invite them to explain why they think the business is worth more.

Liam
 
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For a buyer which would be me... is it best to start off by saying to the seller "ok tell me the lowest you would accept".Or should I come out with a price first obviously a low starting point.

So for example a business priced at £100,000.MY opening offer could be £80,000 or do I say to seller what do you think its really worth.
Click to expand...
Neither. As solopreneur points out, you're buying future incomes. Your valuation today should be based on the size of those future incomes and when in the future they'll materialise (because £10,000 next year is worth more than £10,000 in five years from now). There is an accounting term called Discounted Cash Flow that you can Google. This figure is then adjusted for the extent of risk inherent in the venture and a discount applied based on the likelihood of the business earning less than what you projected.

But there are other methods of valuing a business including going by what multiples similar businesses are selling for. Essentially it's the same thing but rather than doing the exercise of calculating the figures you're relying on what other buyers calculated when they were buying similar businesses. There is an inherent flaw in this of course as those buyers could have been too optimistic in their computations. Also, no two businesses are exactly alike.

Offering £80,000 off the bat means you're doing exactly what the seller may have been doing - plucking figures out of thin air.

There is no one single value for a business. Each buyer has to arrive independently at the figure he believes the business is worth. You need to take the trouble to work this out first before you go deciding on your negotiating tactics or where you'll start your bidding. And you can't work out the projected profit for the next few years without a detailed analysis of the accounts, the business, the market and the environment.

I know jim_gold said earlier that DCF is complicated. I don't believe it is. Any average person should be able to understand it if they spend 5-10 minutes and for somebody looking to spend close to £100K you should give it a shot. I've explained DCF in this article I wrote on business valuations. I do agree with jim that the buyer's own valuation should form the basis of the bid. You certainly don't decide your maximum offer by working on a percentage of the asking price!

I support gordano's suggestion of asking them for the calculations behind their 100K valuation. In fact, I would go further and suggest you don't mention any numbers till they've provided this. If they've pulled the valuation out of thin air they're likely to respond with some vague "we based it on the reputation of this business and the potential is has", not with a professional breakdown of the realistic projections/comparable industry sales etc. If so then they don't have a clue as to how businesses are valued. I see a lot of this type of seller every single day. They are a pain in the a** to deal with because I can't really be bothered explaining the nitty gritty of valuations to them and they aren't working based on established business and accounting principles but on a lottery winning desire. You could ask to speak to their accountant and put it to him to justify the valuation with proper documentation.
 
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jim_gold said:
Hi adventurelife,

This was based on research we carried out in 2009, looking at around 300 companies that were first listed with the Business Sale Report between 12 months and 24 months earlier. We tried to ensure that we included a fair cross section of industries from around the UK.

About 65-70 percent of the businesses were originally listed by business brokers, and although not all the country's brokers were included, we had businesses included in the research supplied by nearly all the leading business brokers.
Click to expand...

Thanks for that Jim

That is really useful info for me

Regards

Peter
 
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It would be helpful to know whether this business is for sale via a business transfer agent.

There are certain agents who value businesses on the high side, way above market value in order to gain instructions.

The agent either waits for a buyer who has not carried out any research to buy it above market price, or wait for the owner to lose confidence with them. When the agent is disinstructed the owner then receives a large invoice due to clauses in the contract they did not realise were there.

If you mention the name of an agent then I could probably tell you whether the business is likely to be overvalued without any further information.
 
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Rhodes100 said:
It would be helpful to know whether this business is for sale via a business transfer agent.

There are certain agents who value businesses on the high side, way above market value in order to gain instructions.

The agent either waits for a buyer who has not carried out any research to buy it above market price, or wait for the owner to lose confidence with them. When the agent is disinstructed the owner then receives a large invoice due to clauses in the contract they did not realise were there.

If you mention the name of an agent then I could probably tell you whether the business is likely to be overvalued without any further information.
Click to expand...

Yikes! You make an excellent case for not using business transfer agents at all. I thought the housing market was bad, but this takes the biscuit!

Oh, sorry, did you instead mean to imply that you are in fact one of the few trustworthy business transfer agents...? My bad.

:rolleyes:
 
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Rhodes100 said:
It would be helpful to know whether this business is for sale via a business transfer agent.

There are certain agents who value businesses on the high side, way above market value in order to gain instructions.

The agent either waits for a buyer who has not carried out any research to buy it above market price, or wait for the owner to lose confidence with them. When the agent is disinstructed the owner then receives a large invoice due to clauses in the contract they did not realise were there.

If you mention the name of an agent then I could probably tell you whether the business is likely to be overvalued without any further information.
Click to expand...

Rhodes any businesses I eye up I find through business agents....I am finding a lot of the businesses are way overpriced.I started this thread because I was going to start to offer what I thought was a good price for a business I liked but then someone esle showed interest who could move quicker than me financially.
 
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Luvbusiness, you are right there are lots of overpriced businesses out there, and you will find that they are being marketed by the same agents.

There are agents out there who "buy a listing", which is basically an unethical trick where some listing agents will inflate the valuation in order to win the instruction.

Just google "business transfer agent complaints"

These dishonest business agents have put a lot of trustworthy business agents out of business, which is a shame for business owners looking for someone to trust.
 
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sherbert said:
I agree to by your car for £1,000 cash.
I turn up, the car is as described so I start counting out the cash.

I count out £950 then go through my pockets and find another tenner, then I get out £13 in change, then I find another couple of fivers, so I have put £983 in your hand but I can't find any more cash. I bet you would let me have the car even though I am £17 short.
Click to expand...

A bloke tried that on with me once. He turned up to buy a car that we had agreed a price on. As soon as he started fumbling through his pockets I knew what he was up to.

He said he only had 'X' amount, when we had agreed on 'Y' amount. I gave him directions to walk down to the nearest cash machine (about 1 mile away, I refused to drive him there) and either pay the full amount or, politely, f**k off. He them 'remembered' about the other £200 he had in his inside jacket pocket.

Moral of the story??? Not sure - either that I'm a tight wad, or that when a deal is done... it's done.
 
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