What Valuation Is and Isn't...
Valuation Standards
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"If I want to sell my business, do I need to get a Valuation? Isn't it better just to find a price I'm happy with then double it to leave room for negotiation?"
Response:Be careful Adam, this question is responsible for countless businesses selling for well below their value or worse- not selling at all. Don’t worry; you’re not the first to ask it. Being business brokers as well as business valuers gives us a unique perspective on the matter… What may seem like a very clever negotiation technique in actuality becomes a very effective method of pricing oneself out of the market. Consider this example- your business has been valued at $500,000. You place it on the market at $1,000,000. What happens next?
Firstly, the buyers who are looking at businesses that are worth $500,000 won’t be looking at your business because it’s well above their price range.
Secondly, the buyers who are looking for businesses worth $1,000,000 WILL look at your business, but will quickly see that it is horrendously overpriced, and move onto another business.
Thirdly, after a period of usually about six months, you will slowly be forced to drop your business back down to its original valuation of $500,000, which is what you should have received in the first place. By this stage, the buyers will have seen your business HALVE IN VALUE whilst on the market, and will justifiably think that there is something wrong. Finally, you will be forced to sell the business for something between $300-$400k; a great deal less than it is actually worth, because the buyers confidence in your businesses apparent plummeting value doesn’t allow for much more. In the end, it’s a choice between selling it quickly for what it’s worth, and selling it for considerably less than it’s worth after close to nine months on the market. This scenario makes it sound like we’re just trying to scare you, but we see it time and time again. Thanks for the question!
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