This article title is a statement I have heard from many business brokers who were explaining to me why they do NOT need to learn how to determine and support a conclusion of value for any privately-held business they plan on listing.
In many cases, those business brokers are correct. Business brokers do NOT need to learn how to perform business appraisals in order to list a business for sale. Generally, a business broker will run a rough analysis, using transactional data from other similar businesses that have sold, considering also a variety of rules of thumb for their specific industry, then after discussions with management, a premium of some size will be added to the listing price. The business is then confidentially marketed, and hopefully, potential buyers begin to ask for data as the sales process begins.
It is at this point that potential buyers begin deciding how little they could get away with offering for the enterprise. Some buyers try to decide which assets they really don’t need to purchase, while others begin strategizing about alternative debt structuring, some others may decide a stock purchase would lead to a lower deal price, while others simply can’t afford what the business is worth, and decide to make a lowball offer anyway.
Does a potential buyer’s willingness to offer a lower price, mean that the business is only worth what that buyer is willing to pay for it? Of course not! However, depending on specific motivations on the part of the seller, that lowball deal may happen anyway. Alternatively, if there are multiple buyers bidding for the business, and the agreed-upon purchase price ends up being higher than the appraised value, the broker will be able to advise the seller to be prepared to carry some of that note. Banks tend to only finance up to the fair market value of a business. Any portion of the potential purchase price in excess of its fair market value will not be included in the bank financing.
We all know that every appraiser has their own opinion, yet having a written report explaining how a conclusion of value was arrived at, and explaining each assumption made, can provide a very strong platform for both a buyer and seller to start negotiating from.
Some business brokers who have actually gone through the process of obtaining a business valuation credential, have realized a few things that the average business broker simply has not considered.
- When a business appraisal is prepared as part of the Offering Memorandum, the written report provides a large part of the buyer’s due diligence, which could save perhaps months in the time of negotiations.
- While a business appraisal report will not prevent a buyer from making a lowball offer, it will make that buyer aware that their offer is low, and allow them to prepare for what follows.
- Each transaction that expects to be financed, will likely require a business appraisal to be performed. One of the items I always ask when performing an appraisal for a lender is a copy of any prior appraisals. It seems that sharing the appraisal the broker performed, with the appraiser the bank hired, is a simple way of also sharing the details a broker may be aware of that an outside expert would not understand.
- A business broker who starts off with a listing where both the Seller and the broker understand what the fair market value of the business actually is, is far more likely to actually sell that business, due to a seller not having unrealistic expectations. There is not much worse for a business broker than having a seller turn down a good offer simply because they believe their business is worth far more than it really is.
So, yes, while it is not a requirement for every business broker to be able and willing to perform a business appraisal of each listing, it may be a good idea to include one in the marketing of at least certain listings.
The International Society of Business Appraisers (ISBA) has converted our training course for the Business Certified Appraiser (BCA) designation into a format that more closely follows an online college course. Instead of taking a full week off of work, we spread the training over an 8-week program. This program includes weekly live group sessions with the instructor over Zoom. Each live session lasts between one and two hours. Learn more about our offerings here.
