There are many factors that affect business valuation including the seller’s personal needs and the terms of the sale. Cooperative conversions add more complexity to determining the sale price and it is important to understand all your options. Additionally, in the cooperative conversion context, both the terms of sale and sales price will be affected by the need for worker-owners to receive wages immediately after the sale. The information below is drawn from a helpful book titled “The Market Approach to Valuing Businesses”.
Does the seller want a quick sale, or will they remain with the co-op?
A seller’s personal needs may significantly impact the sales price. For example, if the seller desires to quickly complete the transaction and end any future relationships with the previous owners, this may diminish the business’ value. By contrast, if the seller is trying to stay on as a consultant to the new cooperative the value will probably be greater since the worker-owners will be able to draw from the seller’s experience running the business.
Adjusting the sales price based on the terms of the sale
In addition to the seller’s personal needs, the terms of the sale can have a significant impact on the sale price of the business. Most sales of businesses are seller-financed – meaning the buyer pays the seller in installments over time. The terms of the sale (interest rate, repayment period, amount paid) can have a significant effect on the final sale price. Because long-term financing can be risky and there will be a disparity between the present and future value of the money the longer the timeline for repayment, the higher the purchase price of the business.
Sales price needs to result in cash flow
In cooperative conversions, the worker-owners will be relying on the business for their primary source of income. The sale price and terms of payment must result in cash flow to cover operating expenses, seller-related financing, and salaries. The need for these cash flows can affect both the overall business valuation and the final terms of sale.
Working with Professionals
While it is advisable for sellers to independently assess the value of their business, they are strongly encouraged and may find it necessary to seek professional assistance, which can greatly contribute to identifying a price range.
Professional Assistance may include:
- Accountants
- Can help organize and evaluate a business’s financial data.
- Apply a pricing formula.
- Help present the pricing information in a compelling format.
- Brokers
- Can help by tracking down information about sales of comparable businesses.
- Tailoring the information to current market conditions in the business community.
- Appraisers
- Can assist with company valuation.
- Typically astute at assigning accurate value to tangible property.
- Identify business shortcomings and suggest ways to increase the business value.
Exercising Caution with Professionals
While professionals can greatly contribute to the valuation process, sellers must be mindful of the potential shortfalls and limitations of professional assistance and make sure that the professionals they have identified have experience and a reputation for honesty.
For instance, sellers should exercise caution when working with brokers, who are often paid on a commission basis. The seller should be clear about what they are seeking. When working with brokers, sellers should be cautious of initial “free” appraisals that assign a very high value to the business, as this is often a ploy to lure the seller into working with the broker who may charge a lot, only to ultimately assign a more realistic value.
When working with appraisers, sellers should be mindful that most businesses’ value exceeds the value of tangible assets, and accordingly should try to find an appraiser experienced in valuing non-tangible factors such as favorable leases and goodwill. Bankers or real estate brokers might be able to help identify an appraiser with a good reputation. The American Society of Appraisers may be able to as well.
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