Mergers & Acquisitions Advisory

A Neumann & Associates, LLC

January 5, 2022

Justifying an Asking Price for Your Business

By Frank Arcoleo

Exit sign

When most people think about selling something, especially something as significant as a business, they typically picture a heated negotiation back and forth between a buyer and seller in order to come to a final deal that perhaps both are unhappy about.  That is the last thing we want to take place.

Most businesses have some complexity, and it is important for a buyer to understand these complexities during the early stages of ownership to avoid costly mistakes with customers, suppliers, and, of course, employees.  Not all of these complexities can be identified and discussed in advance, so a transition process is generally required to allow the business to change ownership without “missing a beat.”  The transition requires the old and new owners to cooperate, working closely together as the new owner learns the unique aspects of the business.

So how do you arrive at a selling price?

The key is to set the asking price at true market value and stick to it.  But “sticking to it” isn’t about stubbornness, it’s about being able to justify that price.

Arriving at a justifiable asking price – and therefore sales price – is the purpose of conducting an independent market valuation.  Such a valuation is always the first step in our process.  There are three distinct attributes of such a valuation, and they all provide for justification of the asking price.

First, the fact that the valuation has been conducted by an independent 3rd party, not the seller’s CPA or brother-in-law or broker, gives a buyer confidence that it has been performed in an objective manner.  In our case, the seller must pay for the valuation up front, meaning that the valuation firm is paid before they calculate the fair market value, not afterwards.  These firms don’t get paid to produce a number that the seller likes; instead, they are paid to produce the most accurate value estimate they possible can.  

The second attribute is the valuation process itself.  The process of doing a valuation is complex, and our partners look at the business from seven different perspectives: two asset-based, two income-based, and three market-based viewpoints.  Plus, the valuation process incorporates seven years of financial information for the business. Our valuation firm partners are accredited, and they subscribe to the financial databases that help them establish risk premiums and comparable market sale prices for similar firms.  These data help the appraiser make key decisions upon which the market value is calculated.

Third, all of our valuation partners’ reports include a calculation of the return on investment (ROI) to the buyer, given the asking price, suggested deal structure, and expected cash flow based on historical (not pie-in-the-sky projected) results.  The report details how the expected cash flow was projected, what the debt service will be on financing obtained by the buyer, and what capital expenditures are required to keep the business operating smoothly.  The result is the net cash flow to the buyer, which is divided by the buyer’s down payment to arrive at a first-year cash-on-cash ROI.  This ROI is used as a check to make sure that the return to the buyer is sufficient to justify investing in the business being sold.

So finally, when we get to the final part of the negotiation process and, let’s say, that the asking price is $5 million, we expect the buyer to agree.  If the buyer says the business is only worth, say, $4 million, we say, “OK, you could be right.  But in order for it to be worth only $4 million, you need to tell us what we did wrong in the valuation.  Were the revenues not correct?  Were the cash flows calculated incorrectly?  Were the discount rates and market value multiples incorrect?”  Most often, the buyer can’t point to a flaw in the assumptions or the logic of the valuation.  So finally, we ask why the buyer feels justified to ask for a higher ROI than the one calculated in the valuation.  Generally, they wind up agreeing to a sale price that is at – or very near – the asking price (and the valuation price).  

That’s the purpose of our process and why we always start with an independent, 3rd party valuation.  We want to sell businesses for our clients at the highest market value achievable – professionally, confidentially, and successfully.

About A Neumann & Associates, LLC

A Neumann & Associates, LLC is a professional mergers & acquisitions and business brokerage firm having assisted business owners and buyers in the business valuation and business transfer process through its affiliations for the past 30 years. With an A+ Better Business Bureau rating, the company has senior trusted professionals with a deep knowledge based in multiple field offices along the East Coast and has performed hundreds of business valuations in its history. The firm’s competitive transaction fees are based on successfully completing transactions. For more information, please contact A Neumann & Associates at 732-872-6777 or info@neumannassociates.com

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Client Testimonials

“I recently contacted A. Neumann and Associates about getting a valuation of my business done. I spoke with Marc, who explained the process in detail. After meeting with Marc in order to get a clear understanding of my business, and what I was hoping to accomplish. His patience in answering all my questions and his knowledge of the proper way to market my business gave me great confidence that this is the firm I will be using to sell my business for max value. Working with Marc at A Neumann & Associates was very easy and professional. I did not know all that was going to be involved in selling my business but they helped me through the process. What I thought was going to be a just another one of those pushy sales companies was just the opposite. Polite, knowledgeable, and a pleasure to talk to and deal with. I highly recommend this firm to anybody who wants to sell now or down the road. Marc not only knows his stuff, but actually is a real nice guy.”

Double Diamond

“Used A Neumann & Associates to sale my business. could not imagine having done it with out the patience and experience Gary provided. Thanks Gary,”

Dennis Frazier

“Working with Marc and his company was a pleasure. What I thought was going to be a just another one of those pushy sales companies was just the opposite. Polite, knowledgeable, and a pleasure to talk to and deal with. Marc handled most of the interaction and he has one of the greatest demeanors. Again, it was a pleasure working with him and his firm.”

Douglas DiCeglio

“I recently completed an acquisition using A Neumann & Associates. Tony Valentino was very helpful and accessible during the entire process. They do a thorough job vetting both parties and got us to the finish line.”

Srini Mudambi

“Claus out of Florida helped us with the sale of our business. We had never done anything like this and him and his team walked us through the process from start to finish. We had some challenges through the process and Claus continued to show up even in the difficult conversations.”

Colby Harris, Co-Owner, Del Mar Designs

“Claus Madsen thoroughly helped us with selling our company. From the 1st introductory meeting explaining to us what was possible, to providing us with resources to assist with the sale. Claus was invaluable throughout the whole sales process. Claus was with us every step of the journey and always made himself available for any questions or issues that came up along the way. If you are interested in selling your business, I encourage you to reach out to Claus and the ANA team so that they can let you know what’s achievable. These guys will make it happen!”

Ron Harris, Co-Owner and Vice President, Del Mar Designs

“A Neumann & Associates is the only business broker I would use or consult with. They have assisted with 3 business sales over the past 15 years with me. They are honest and sincere and have always performed better than my expectations. They are the only one i would use for the sales of my businesses.”

James Belanger, Business Owner

“I wanted to take a second to commend the exemplary customer service from both you [Karin Neumann] and Mr. Valentino. It’s both a rarity in the industry, and very much appreciated.”

Andrew G., Investor

“We worked with Neumann & Associates to investigate the purchase of a research company in 2010 and found Achim to be capable, forthright and realistic. His depth of experience enabled us to fully understand our options, offering creative options that might enable the acquisition. While we didn’t acquire that particular company at that time, we know exactly who to call whenever we’re looking to buy or sell a business.”

Daniel Coates, Buyer

“Purchasing a business through this firm was a pleasure. Gary was very professional and transparent throughout the entire process. I look forward to working with A Neumann & Associates in the future.”

William Klemens, Buyer
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Contact A Neumann & Associates, LLC

If you are considering selling your business, please contact us to learn more about our comprehensive service spectrum. Our experienced professionals will answer all your questions about selling a privately held business in complete confidentiality. Please fill out our contact form, or call us at 732-872-6777. We will contact you directly and will never identify ourselves to your employees.

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