It can be really tough to figure out what a business is worth.
Some sellers expect to get back every nickel they ever put into the business. Some want to base their listing price on industry multiples. Some business brokers will even tell you they have a “proprietary metric” that will tell you the best listing price. There are a litany of ways you can arrive at a number, but one of the most common is by using comps.
What is a comp? If you’ve ever bought or sold real estate then you’ve probably heard the term. It’s short for comparable, meaning you create a price based on what something similar recently sold for. Seems simple, right?
In the housing market, pricing based on comps makes a lot of sense. Houses that are similar and in similar neighborhoods are going to be worth roughly the same amount.
The same can not be said for businesses, however. Comps can be very useful when trying to determine a ball-park figure, but they break down once you get down to the details simply because businesses are inherently very complex.
Here’s an example to illustrate what we mean:
The seller of a large cafe wants to list his place for the same price a similar-sized high-end seafood restaurant down the street sold for. The problem comes when you look deeper. The cafe seller is making roughly what the seafood restaurant was, but he’s got a big chunk of unpaid tax debt to deal with, all of his kitchen equipment needs to be replaced and he’s the head chef so any buyer will have to factor in the salary of a replacement chef. Basing a listing price on the comps for square footage and gross sales wouldn’t work in this situation because the businesses are very different beyond those two very narrow metrics.
Does this mean you should ignore comps when determining your listing price? No, absolutely not. They are a very useful tool when used realistically and in conjunction with the metrics that make the most sense for your business.
If you are curious about what businesses comparable to yours have recently sold for, talk to a business broker. They can tell you what the market looks like for businesses in your industry and can help you look at your business as a whole to determine the best listing price.
Are you considering selling your business and want more information about businesses like yours that have recently sold? Would you like to know more about the listing process? Ask us! Leave any questions or comments here and we would be happy to help.
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