#1 Mistake Business Buyers Make
What could it be? 🤔
Buyers often obsess about business multiples and end up missing the big picture by confusing the trees from the forrest.
What is the purpose of a business multiple?
According to Investopedia, “A multiple measures an aspect of a company's financial well-being. Investors use multiples to quantify a company's growth, productivity, and efficiency.” [1]
Bottom line…
From a buyers perspective: A 2x multiple means that it will take you about 2 years to get your ROI for the purchase of the business.
From a sellers perspective: A 2x multiple means that you will get about 2 years worth of work in one big transaction.
What is the #1 mistake buyers make when buying a business?
Comparing multiples from one brokerage to the next and assuming that the multiples have been calculated the same way. The #1 mistake many sellers make is choosing a brokerage based on multiples alone.
Some brokerages include the cost of inventory within their list price which will impact the multiple the business will appear to sell at. While other brokerages don’t include the cost of inventory since this is typically calculated days prior to the sale.
As a potential seller, one could make the wrong assumption that one brokerage is better than the other given that their “multiples” are higher. But as we know, this is not the case, one brokerage is simply excluding the cost of inventory when calculating the multiple.
For example,
Let’s say we have a business doing 500k in discretionary earnings.
Brokerage A might list this business at a 3x multiple for a total price of 1.5M.
Brokerage B might list this exact same business at a 3.8x multiple for a total price of 1.9M since they include the cost of inventory.
This might trick people into thinking, “Wow, brokerage B is so much better than brokerage A because they are selling my business at 0.8x higher multiple”.
Not so fast…
One brokerage is simply including inventory and the other is not.
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This newsletter is presented for informational purposes and educational purposes only and should not be construed as professional financial advice. Should you need such advice, consult a licensed financial or tax advisor. No guarantee is given regarding the accuracy of information on this letter. The newsletter is composed of opinions and is not intended to give investment advice.
[1] https://www.investopedia.com/terms/m/multiple.asp