When you’re ready to sell your business, the first step is obtaining an appraisal to determine how much your company could potentially sell for. To do this, you’ll want to find a credible business appraiser to evaluate your company and find the fair market value for your business. You may be wondering, “What exactly does fair market value mean?” By definition, the fair market value is “the amount at which the property would change hands between a willing buyer and a willing seller.” So that should obviously preclude an analysis of active listings since they’re missing the buyer, right? As a veteran business appraiser in Texas, I’ve seen many different types of deals. I’m going to breakdown how business brokers in Texas use active listings when appraising a business, but it may not be in the way you think. There are many different factors that go into business appraisal and valuation, so here’s what you need to know before you look into selling your business. Why Don’t Business Appraisals Include Active Listings As Comparable Sales? From an analytical standpoint, it makes sense to include listings as comparable sales. However, the business brokerage world has a totally different set of rules when working directly with buyers and sellers. They come to us wanting to know what’s happening in the marketplace, not what’s already happened. Throughout the course of my banking/business brokerage career, I’ve seen and reviewed a lot of commercial real estate appraisals that use active listings as comparable sales. Among these, there has been a fair amount that involves a willing buyer and seller, but for whatever reason doesn’t make it to the closing table. Don’t those deals at least somewhat represent fair market value? Is incomplete data better than no data? Well, even if that data is useful, there’s no reliable source that aggregates it. Compiling it would be mostly fruitless, maybe even impossible, since LOIs (letters of intent) and unconsummated purchase agreements are confidential in nature. How Do You Properly Appraise a Business? On the other hand, I receive inquiries from buyers and sellers who eventually want to be in the marketplace but aren’t quite ready yet. They simply want to know what their business is worth today. This is when the commonly-used rule of thumb can be helpful for understanding the nuances of how different types of businesses are bought and sold; for example, based on a multiple of annual revenues plus inventory versus a multiple of annual SDE (seller’s discretionary earnings). Although this is a good start, I don’t end here, especially if the reported value ranges are hundreds of thousands of dollars apart. After a rather in-depth analysis of the profit and loss statements and balance sheet, I prefer to pull comparable sales from done-deal databases. I make sure the deal cashflows enough to provide a good living and service debt under a typical SBA loan structure and aggregate these findings into a defendable price we can take to the marketplace. Although it is just the first part of a long sales process with many twists and turns, this approach sets us up for success: Bison Business has closed over 90% of our deals at over 98% of asking price. Tools for Successful Business Appraisals and Valuations When beginning a business appraisal and valuation, you can’t forget about all the other businesses for sale. Buyers have tens of thousands of listings to choose from on one of many business-for-sale websites, such as BizBuySell. What happens if comparable listings are priced at a lower multiple than comparable sales? True, this doesn’t happen very often, but I have seen it happen. I expect it to become more prevalent as more business owners seek to sell their businesses: as the supply of businesses for sale increase, the deals must be sweeter to entice a limited buyer pool. If appraisers stick only to using historical sales data to determine fair market value, they’ll continue to be behind the market. This could be just fine for business appraisers who are strictly focused on just doing fee appraisals, their job is relatively easy in this case since historical data would most likely support a higher appraised value. But as a broker, if we fail to research what’s happening in the marketplace and price a listing based on sold comparables with higher multiples, we are wasting everyone’s time and doing our clients a disservice. The listing will sit for months with no activity until the price is eventually lowered to a more reasonable level. Even then, the seller won’t be happy with the outcome since we, as business brokers in Texas, set price expectations too high from the beginning. How to Find Comparables While many of us are experts at pulling data from BizComps, DealStats, or Peercomps, not everyone has access to an asking price valuation tool. There is no way to separate businesses based on SIC or NAICS codes, and at first glance, BizBuySell’s selection tool can be frustrating to the average visitor. Although one cannot download the data sets, they can still bracket the results based on gross revenues or discretionary earnings (referred to as “cash flow” on BizBuySell). Here’s how: First, click the “advanced search” option on the bottom right side of the selection tool on the home page: Then, click “More Search Options” on the bottom left side of the selection tool: Input the desired revenue/SDE (cash flow) ranges in the areas provided, and be sure to choose the proper business category and geographic area. BizBuySell defaults to your home state, so be sure to update it to include “ALL of US:” After clicking the orange “Search Businesses” button, any businesses that fit the selected parameters will show up on the following page. Although it’s a bit tedious, it’s relatively easy to input the data into a spreadsheet that sorts the data based on revenue/SDE multiples. I’ve found that saving 5-10 examples as PDFs, which I then present to a prospective buyer or seller, is very helpful in building a case for current value, over and above what’s happened historically. So, How Do Business Appraisers in Texas Use Active Listings? As I’ve broken down, there are many methods and tools to find the fair market value for a business. Hopefully, this has shed some light on how a broker or appraiser uses active listings to accurately appraise companies. If you still have questions, or you’re ready to have your business appraised, contact us today and let’s find out how much your business is worth!