Your Most Probable Selling Price
(Sometimes referred to below as MPSP)
A word of caution about Most Probable Selling Prices; they don’t apply to all buyers.
Buyers come in two types: financial buyers (“owner operators” and equity investors) and strategic buyers. MPSPs apply to the first type, but strategic buyers have their own perspectives, which often includes circumstances that can’t be predicted by outsiders. This page has more information about both types.
Our Three Levels of MPSP Precision
Level 1 uses a free-easy-inaccurate online pricing algoithim. Most websites in our industry have one, but if you use these automated calculators, consider the result as somewhere in a large ballpark, because it won’t recognize any of your unique aspects. If you’re interested in a ballpark figure, use our Level 1 calculator.
We provide a more accurate free estimate as a part of our complimentary initial consultation. This price calculation is based on an analysis of additional financial data and your answers to a few questions, but the broker is still not yet fully informed, so please consider this estimate as +/- 15%. More about the consultation.
Clients receive our most detailed analysis as a part of their Confidential Offering Memorandum. This is the analysis we will defend when negotiating the sale. We also offer it to buyers to support their loan applications, although their banks often require a certified appraisal. Equitas can also provide Certified Business Appraisals and this service is normally billed to the buyer.
Real estate and equipment appraisals can be provided by an AIC Canada designated member.
How Each Price Level is Calculated
The difference in the three levels is based on access to information
Level 1 must use a simplified multiple of your SDE (Seller’s Discretionary Earnings) because it’s purely automated. Based on a standard formula applied to your answers to a few financial questions, it pops out a ballpark figure. Whether that number pleases or disappoints you, should not be the basis of a decision. We offer it because sellers have an insatiable desire for information, and it gets you started. In any case, you may obtain a much better estimate without cost by simply asking us. (Go here).
Level 2 requires that we have copies of your financial statements and an opportunity to ask some clarifying questions. Although still an estimate, it’s far better than Level 1. We are confident enough in a level 2 estimate to base our fee structure on it.
Level 3, available only to clients, is the price we calculate for taking a business to market. It requires a thorough understanding of your business, including strengths and weaknesses which can only be properly understood after at least two interviews.
Past performance is just the beginning
There is a fundamental understanding of the buyer’s mindset that some sellers miss… a buyer looks at the facts and figures of your past performance only as a starting point for predicting the future.
We know that creating a believable, positive vision of the future makes a big difference in determining the financial buyer’s desire and the final value of your business.
How Strategic Buyers Can Change Everything
Strategic buyers will also be concerned with the profitability shown in the MPSP results, but the actual number is less important. A strategic buyer has the abilty to dramatically improve the bottom line of the company they acquire.
How your company fits into the strategic buyer’s plans is perhaps more important. They might be looking for vertical expansion (replacing a purchased product or service so they control more steps in production) or horizontal expansion (creating new markets or product lines). It could also serve their purposes to eliminate you if you were competitors, or add some desirable aspect of your company to theirs.
With all the strategic buyer’s possible motives, it becomes clear why predicting your company’s value to a strategic buyer is impossible. This is why companies that fit the profile for strategic acquisitions are often advertised without asking prices.
The Acid Test of Price (for Financial Buyers)
It’s natural to want the best price for your company. That’s our goal as well, but don’t let fantasy make your decision. It’s important to go to market with a defendable price rather than a too-high price that just feels good to you.
Equitas has developed an analytical tool (we call the Acid test) to determine how and if a financial buyer can afford to purchase your business at a particular price. Some brokers call this the Sanity Test because owners sometimes have insanely high expectations.
Based on a normalized SDE (the total of what a buyer has to spend), this analysis shows how that cash will be consumed by bank requirements, debt, and the new owner’s wages. If there is insufficient money to go around, a buyer has no reason to proceed.