All About Pricing a Business

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WEBSITE: https://www.bossgi.com/

RELEASE DATE: April 4, 2024

SHOW NOTES:

Boss Talk: Selling Businesses with Jim Parker and Carey Sobel - EP 4 | All About Pricing a Business

In this episode of Boss Talk, hosts Jim Parker and Carey Sobel delve into the nuances of pricing a business for sale. They discuss the importance of proper pricing, emphasizing that it's the most critical aspect in the sales process. Overpricing can hinder the sale, while underpricing leaves money on the table. The episode covers various aspects including the role of brokers and business appraisers in pricing, the significance of understanding the 'why' behind pricing, and the relevance of accurate financial reporting, including discretionary earnings and EBITDA. They also discuss the impact of factors like customer concentration, lease terms, and owner involvement on the multiplier used to price a business. The hosts stress the importance of working with experienced brokers to ensure a business is priced accurately, considering all variables and market data.

00:00 Welcome to Boss Talk: Navigating Business Sales
00:15 The Art of Pricing a Business for Sale
00:43 Why Pricing Matters: The Seller's Perspective
02:40 The Role of Brokers and Appraisers in Business Valuation
03:49 CPAs and Their Impact on Business Valuation
11:32 Unpacking Discretionary Earnings and Add Backs
21:46 Exploring Depreciation, Amortization, and Other Add Backs
26:57 Understanding Owner's Salary in Business Valuation
29:29 Understanding Business Valuation: Owner's Salary and Discretionary Earnings
30:38 The Role of EBITDA in Business Sales
31:43 Adjusting EBITDA and Discretionary Earnings for Business Valuation
34:10 Comparing EBITDA and Discretionary Earnings: A Practical Example
37:00 Factors Influencing Business Multipliers
47:08 Analyzing Financial Statements for Business Valuation
57:01 The Importance of Clean Financial Records When Selling Your Business

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All About Pricing a Business: Insights from EP. 4

Intro to Business Valuation

In the competitive landscape of businesses for sale, determining the right price for a business can often seem more like art than science. However, seasoned brokers, Jim Parker and Carey Sobel, host of the informative podcast series "Boss Talk," delved into this complex subject, shedding light on the crucial aspects of pricing a business accurately.

Why Pricing Matters

The episode kicked off with a fundamental question: "Why is pricing a business for sale so crucial yet contentious?" The simple answer lies in balance. Price it too high, and the business might never sell, stagnating on the market. Price it too low, and you're leaving money on the table, potentially undermining years of hard work. Jim and Carey punch home the point that the right price is not just a number—it's the most critical part of the sale process. It represents a delicate equilibrium between a seller wanting to maximize returns and a buyer wanting value for their investment.

The "How" of Pricing

The real meat of the discussion focused on how to price a business for sale. Jim and Carey broke down the numerous methods used to evaluate a business, from market comparisons to income approaches. However, they emphasized that ultimately, a business is worth what someone is willing to pay for it. This notion translates to understanding the market and utilizing different pricing methods as tools to suggest a starting point, rather than definitive answers.

The Importance of the Broker's Role

A significant portion of the talk spotlighted the role of "brokers and business appraisers" in the pricing process. With their experience and understanding of the market, brokers - like Jim and Carey - perform a Broker's Opinion of Value (BOV), setting the stage for what a business could potentially sell. They clarified that such opinions are grounded in data, including market stats and comparable sales, offering a personalized assessment based on the business's unique attributes and industry benchmarks.

Common Pitfalls and Advice

Jim and Carey also ventured into common pitfalls in business valuation, such as overvaluation by CPAs or underreporting income. They strongly advised against these practices, underlining the importance of clean, transparent financials for securing a fair valuation and a smooth sale process.

In discussing "add-backs," a crucial component in business valuations, they provided tangible examples, like the one-time expenditure on a luxurious waiting area in “Carrie’s Car Wash.” These are l