Using Pratt’s Stats To Sell More Businesses
One obstacle to selling a business is an unrealistic asking price. GABB members can obtain access to Pratt’s Stats which can help sell more businesses by helping to price a business accurately. While Pratt’s no longer offers GABB members complimentary access, if a broker submits the details of a sale, they can obtain access to the database for a period of time at no cost.
The following is from GABB President Matt Slappey’s presentation at the July 2013 GABB meeting.
Pratt’s Stats can help you:
- Set REALISTIC owner expectations.
- Feel confident that you can support your asking price for your listings.
- Become knowledgeable about many industry values.
Brokers should use this tool in conjunction with Business Reference Guide and other sources. Pratt’s Stats allows you to validate information from each source!
What is the difference between BIZCOMPS® and Pratt’s Stats®?
BIZCOMPS® mainly covers main street businesses. As of February 2013, the median selling price of all the transactions in BIZCOMPS® was $168,000. BIZCOMPS® data includes up to 21 data fields per transaction.
Pratt’s Stats® covers both main street businesses, middle market transactions, and larger M&A transactions. As of February 2013, 60% of the deals in the Pratt’s Stats® database are businesses that sold for $1,000,000 or less, and 38% of the deals are businesses that sold for between $1,000,001 and $500,000,000. As of February 2013, the median selling price in Pratt’s Stats® was $440,000. Pratt’s Stats® data includes up to 89 data fields per transaction.
Does BIZCOMPS® overlap Pratt’s Stats®?
There is little overlap of information from BIZCOMPS® and Pratt’s Stats®, although there may be a few transactions that are in each database.
Do BIZCOMPS® and Pratt’s Stats® calculate transaction multiples the same?
No. There is one key difference between the two databases. BIZCOMPS® sales are all asset sales and the selling price does not include the cash, accounts receivable, accounts payable and inventory. Pratt’s Stats® sales can be either an asset sale or stock sale. For an asset sale, the Pratt’s Stats® selling price generally includes inventory and generally excludes cash, accounts receivable and accounts payable.
What is Pratt’s Stats?
- A Database of 19,500+ Private Company Sales
- Two Decades of Accumulated Transactions
- Additional Articles and Quarterly Reports
- Run by Business Valuation Resources, LLC and located at www.BVMarketData.com
- It’s FREE for GABB Members
- Board Members may issue a password
See a detailed primer describing how to use Pratt’s Stats Transaction Data for Private Company Valuations.
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Buying or Selling a Business: The External View
There is the oft-told story about Ray Kroc, the founder of McDonalds. Before he approached the McDonald brothers at their California hamburger restaurant, he spent quite a few days sitting in his car watching the business. Only when he was convinced that the business and the concept worked, did he make an offer that the brothers could not refuse. The rest, as they say, is history.
The point, however, for both buyer and seller, is that it is important for both to sit across the proverbial street and watch the business. Buyers will get a lot of important information. For example, the buyer will learn about the customer base. How many customers does the business serve? How often? When are customers served? What is the make-up of the customer base? What are the busy days and times?
The owner, as well, can sometimes gain new insights on his or her business by taking a look at the business from the perspective of a potential seller, by taking an “across the street look.”
Both owners and potential buyers can learn about the customer service, etc., by having a family member or close friend patronize the business.
Interestingly, these methods are now being used by business owners, franchisors and others. When used by these people, they are called mystery shoppers. They are increasingly being used by franchisors to check their franchisees on customer service and other operations of the business. Potential sellers might also want to have this service performed prior to putting their business up for sale.
Read MoreDoes The Deal “Fit”?
It is possible for a buyer and seller to have done all of their financial due diligence, to have researched the business sector thoroughly, and still end up with a deal which falls flat in the end.
This is because, as any entrepreneur worth their salt will know, business isn’t just about the numbers. Successful organisations don’t just have competent staff working within an efficient system, they also have a culture which motivates and supports both employees and regular customers. Without such a culture, even the best-run business venture will fail.
A few examples make it easy to understand the importance of culture. Just think about how a merger of IBM and Apple would have worked in the 1980s. IBM had the capital, and Apple had the innovative ideas and modernising know-how.
Despite this, it is almost impossible to consider such a merger being a success. The cultures of the two workplaces were just too different. Similarly, albeit on a smaller scale, local music venues or bars which join a larger franchise often find that their profitability falls, despite the availability of cheaper supplies and a reliable brand name.
Of course, some business owners who are looking to sell their company might not be particularly bothered about whether the deal is a good ‘fit’. If they are only receiving money in the transaction, the future success of the business might not really matter to them.
In reality, however, the person selling the business is likely to have some kind of stake in its future success. This might be because they have received equity as part of the deal, or even because they are staying on to manage it as a subsidiary of a larger purchasing group.
In addition, one should not underestimate the emotional pull of a business. Even if there is no financial benefit to the business succeeding, most former owners will want to see their old company doing well.
Even if the person doing the selling isn’t particularly concerned with the cultural fit of the new owners with their business, it is certain that existing employees will want to make sure that the deal is a ‘fit’.
A lack of willingness to listen to their concerns is never a good idea, either for the person buying or for the person selling. After all, the deal might not go through, and ignoring staff concerns could leave the current owner with serious morale issues.
Fortunately, it is easy enough to ascertain whether a cultural fit is likely. Firstly, make sure that you do your research on the entity buying the business. If it is an existing company, how do they organise themselves? Are they hierarchical or more free-form, and what sort of behaviour do they expect from their employees?
If the new owner is an individual without a track record, then just ask them directly how they intend to approach the business. If they seem dead set on changing everything about the company, you may want to suggest a transitional period during which such changes can be phased in.
Both buyer and seller will be better served by ensuring that the new culture of the business is as successful and efficient as the old!
This article was contributed by BusinessesForSale.com, the market-leading directory of business opportunities from Dynamis, the online media group also behind FranchiseSales.com and PropertySales.com
Read MoreWhen to Create an Exit Strategy
There is the old saying that the time to develop an exit strategy is the day you open for business. Sounds good, but it’s not very realistic. Further, it also isn’t very optimistic. On the day you open for business, thoughts about how you get out of it aren’t pleasant, or helpful, thoughts. However, as you get the business to a place where you have a bit of extra time to plan, you will find that the things you need to do to improve your business are some of the very things you will need to work on to plan an exit strategy.
You can’t predict misfortune, but you can plan for it. One never knows when an accident or illness will force one to sell. When the drive to your business becomes filled with dread, maybe it’s time to consider selling. The following ideas will improve your business, even if you’re not currently considering selling. Dealing with these areas will also supply the information a buyer will most likely be looking at when the time does come to sell.
Buyers want cash flow.
This, at least on the surface, is the thing a potential buyer will want to look at.
Appearances are important.
You may think everything about the business looks fine, but the two letters on the neon sign that don’t work indicate to a possible buyer that the seller may have lost interest in the business, causing them to also wonder what else doesn’t work or has been neglected.
There is probably more value than you think.
Business owners often don’t look at things that do create real value such as: customer lists, secret recipes, specialized computer systems, programs, customer loyalty programs, etc.
Eliminate the surprises.
Make sure the lease is transferable and that your landlord is willing to cooperate. Resolve that issue with town hall. Resolve the problem with that angry customer. Minor problems and issues will often raise their ugly heads during sensitive times, spooking a possible buyer. So, the time to resolve them is before going to market.
Read MoreFive Kinds of Buyers
Buyers are generally categorized as belonging to one of the following groups although, in reality, most buyers fit into more than one.
The Individual Buyer
This is typically an individual with substantial financial resources, and with the type of background or experience necessary for leading a particular operation.
The individual buyer usually seeks a business that is financially healthy, indicating a sound return on the investment of both money and time.
The Strategic Buyer
This buyer is almost always a company with a specific goal in mind — entry into new markets, increasing market share, gaining new technology, or eliminating some element of competition.
The Synergistic Buyer
The synergistic category of buyer, like the strategic type, is usually a company. Synergy means that the joining of the two companies will produce more, or be worth more, than just the sum of their parts.
The Industry Buyer
Sometimes known as “the buyer of last resort,” this type is often a competitor or a highly similar operation. This buyer already knows the industry well, and therefore does not want to pay for the expertise and knowledge of the seller.
The Financial Buyer
Most in evidence of all the buyer types, financial buyers are influenced by a demonstrated return on investment, coupled with their ability to get financing on as large a portion of the purchase price as possible.
Almost all the purchasers of the smaller businesses fall into the individual buyer category. But most buyers, as mentioned above actually fit into more than just one category.
© Copyright 2013 Business Brokerage Press, Inc.
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