Agreeing on a fair business valuation-covid related profitability increase

by a searcher from Brigham Young University

1 year ago

I have found a handful of businesses that have done exceptionally well in###-###-#### This is often in the service industry as a result of the uptick in construction needs throughout Covid. One particular business I am looking at had a 30% increase in profits from '19 to '20 and then a 20% decrease from '20 to '21. 

How do you get brokers and sellers to realize that the increase in profits is not sustainable and the multiple should not be based on a great year that was out of the ordinary? It is hard to tell people that their baby is ugly. What are the best ways you have been able to communicate this without hurting feelings?

It seems to me that part of this should be the broker's role and it would help them close more deals. If not, they'll continue at the rate they are going selling 30% of the businesses that they list.

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searcher from Brigham Young University

Thanks Chase.

1 year ago | like reply | 0 likes

searcher from Cornell University

There are a lot of good ideas that have been shared here. I think a good conversation piece in this situation would be proforma financials. If the company has them, it's a good indicator of how they're viewing the ups and downs and whether they're even recognizing the volatility or past drivers. If it's something you put together yourself as the buyer, it's still helpful in sharing and explaining how you view the business and its future potential. There's also always adjusted EBITDA that can bring the valuation to a more realistic range. I wouldn't worry too much about hurting people's feelings in this situation if you're being realistic and honest - it's just business, and if you feel this way, they're probably hearing it from others as well.

1 year ago | like reply | 0 likes

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