Factors that Impact Buyer Demand and Price for a Business

Dec 20, 2018

It is common in states that facilitate election voting in public places to divide the community’s population by the first letter of the individual’s last name for processing ballots.  Many constituencies draw the line at A – M and N – Z. This sounds like a logical solution to facilitate timely voting. However, the best of intentions often results in longer lines for one group of voters than the other.  Statistically, 64% of registered voters have names that begin with letters A – M and 36% between N -Z, according to L2, a non-partisan voter analysis firm. This is an example of an incorrect assessment of supply & demand by a service provider.  The implications of this wrong assessment are extended wait times to vote. An inconvenience, but not an incorrect assessment that results in significant detriment for an individual.

The sale of a business is a process that requires a proper assessment of market demand to achieve a timely sale at a “fair market” value.  If a business is overvalued when it is brought to market, it will commonly sit on the market for an extended time period and potentially not sell.  If a business is undervalued, it will likely sell quickly resulting in a loss of value for the seller.

The proper valuation of a privately held company or family business is a sophisticated, nuanced process that requires significant knowledge and experience.  It is a process best performed by an individual with knowledge of local market conditions and the industry of the business. The following are three factors that should be taken into consideration when valuing a business by a professional:

  1. Geographic Location –  Businesses sell at premiums and discounts, all other factors being equal, based on their location.  The reasons this occurs include the number of buyers interested in acquiring a business in a specific area, the demographics of the community, local rent rates and real estate values, relevant taxes, and labor availability and rates.  Traditionally, only business brokers actively engaged in representing businesses in a specific geographic area will be able to incorporate this element into their price assessment.
  2. Industry – Business values are directly impacted by their industry.  IBA commonly facilitates transactions with business values of between 2 – 6 times EBITDA.  The place a business falls on this spectrum is significantly influenced by its industry. Proper valuation of a business requires knowledge of prior transactions and market conditions in a specific industry.  It is always recommended that a business owner engage a business broker with relevant experience & knowledge about their industry, if they wish to achieve a timely sale at a premium value.
  3. EBITDA – The greatest factor impacting business value is the profitability of the business. The larger the bottom line, the higher the value commonly achieved for a business.  The higher the EBITDA the more potential acquisition partners available to a business owner. Acquisition partners in the middle market start with individuals, advance to privately held companies and private equity firms, and conclude with publicly traded companies.  IBA frequently facilitates business sales that appeal to 1, 2, or 3 of these parties. One of the jobs of a business brokerage firm is to create a marketplace for the sale of the business. The more interested parties generally the higher price achieved.

The valuation of a business is subjective science requiring knowledge and experience. All relevant factors should be incorporated into the valuation process. IBA for 44 years has properly valued companies so they sell at “fair market” values in a timely manner for our clients.  Buyer acquisitions, at prices within 10% of the list price for IBA represented business, are commonly endorsed by the CPA, appraisal, and banking communities. No business brokerage firm in the Pacific Northwest has sold more businesses than IBA. No other firm has a greater grasp of the intangible market factors that impact business valuation.  If you are interested in selling your business in 2019 for the best possible market value, we would welcome the opportunity to provide an overview of the services we provide our clients.

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, and mergers & acquisitions community on subjects relevant to the purchase & sale of privately held companies and family owned businesses.  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.