Would You Pay $899,000 To Buy This Business? Forbes Article

August 31, 2020

by a searcher from University of Southern California in St. Louis, MO, USA

I found this article this morning, and thought it would be helpful to other searchers:

https://www.forbes.com/sites/joshpatrick/2015/05/28/would-you-buy-this-business/#23877af215e2

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Reply by an intermediary
from Boise State University in 800 W Main St, Boise, ID 83702, USA

Please understand that not all brokers/intermediaries are the same. Just like all bankers, CPAs, attorneys, etc. are not the same. Some business intermediaries have the appropriate financial education and knowledge of how to price and sell a business. Others do not. Check the broker's credentials and see if he/she is a CBI and a member of the International Business Brokers Association (at a minimum). Also, some have additional credentials and education in business valuation.

And no, I wouldn't buy this business. And I would not have listed it for this price. The buyer's sanity test doesn't work. BTW, professional and knowledgeable business intermediaries prepare a buyer's sanity test BEFORE taking the business to market (note the words "professional and knowledgeable'). Also, in most cases, this intermediary will do a valuation report and review with the seller. If the seller believes the business is "worth more", then the intermediary has calculated, that intermediary has a couple of options which are 1) walk away from the deal, or 2) list the deal and hope to get the seller to reality when the buyers make low offers.

Also keep in mind, there are generally TWO kinds of business brokers which include: 1) those who take fewer listings and price them appropriately based on proper valuation techniques and 2) those who list everything and hope the market weeds out the crazy stuff. Guess which type I subscribe too?

Reply by an intermediary
from The University of Chicago in Chicago, IL, USA

The numbers in the article are misleading. The facts are either incorrect or miss-typed. However, the point that brokers are not doing proper work is correct (imo, it is true only for very few brokers).. But same is true for most other professions (CPA, MBA, Attorneys, etc.). Also, as pointed out by Barry Baker, the listing broker could have used 2x+inventory method to justify the asking price (though I don't agree with this approach. A buyer should add up all costs to buy as pointed out by Mark Kuether). Such things also occur on larger deals when a search funder considers EBITDA multiple method as Bible. "Sanity Check" as pointed out by Sheila Spangler is a must; however, you can pass the Sanity Check with any lower value. A proper method is to determine the maximum price that the buyer can afford to pay while a) being able to service the debt, b) getting the equity return, c) being able to get the deal financed, d) being able to fund equity., etc. Further buyer should do sensitivity analysis.

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