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Should You Knowingly Overpay For A Business?

Willard Michlin, CPA, CFE


Contributed by Willard Michlin, CPA, CFE

I remember growing up hearing from sellers the following sales pitch for why I should pay them top dollar.” You can get fresh oats for a fair price or you can get oats that have gone through the cow for a lot cheaper.” The other one I heard was “Quality remains long after price is forgotten.”  After 20 years of being a business broker, I have heard every justification in the world for why this owner’s business is special and deserve a price at top market.

The difficulty for a buyer is two fold. The asking prices are presupposing that the report sales and profit are applicable for this time frame, not the civil war. Ninety percent of the time the profit is a lie, which makes the asking price unimportant. For the remaining ten percent, where the profit and sales figures are accurate and based on the current month’s numbers, the profit level becomes critical. If it is a small profit, and only affords the owner a low wage, it is stupid to pay too much just for a job. If the profit is substantial and more then the buyer needs, it might actually make sense to pay top dollar or even more. .

The reason is that in this economic climate, the numbers of businesses making a desirable profit are so small that if you can find one of those “keepers” it is worth paying a premium to get it. If you over pay at least the business profit can support the extra cost and when all the loans are paid off the price will be forgotten. Of course, if you are lied to about the numbers, then any price you pay is too much. The reason the sellers lie is because they know that if they told you the truth you would not buy the business at any price or at a price so low the seller figures he might as well just keep it.

So first make sure you have the business reviewed in and out and upside down. Put it through the audit from hell, and if it still looks after that, you may have found a diamond. In those rare cases, consider paying what you must, in order to not let that good one, get away.

About The Author:  Willard Michlin, CPA offers business buyers Due Diligence Services (Second Opinion, Offer Assistance, Final Due Diligence) when they are thinking of making an offer on a business or in the process of investigating a business purchase. Serving all of Southern California. He has written numerous articles on the due diligence process and can be reached direct at 805-428-2063 for more information and an appointment.

Posted on December 5, 2011  |   Email This Blog Post   |   Print This Blog Post   |  All Contributions From Willard Michlin, CPA, CFE

 Categories: BizBen Blog Contributor, Buying A Business
 

Comments:

Pretty much I go along with the idea that you can't really overpay for a business. If the supposed "right" price is $500,000 for a company with annual $200,000 in EBITDA, that is 2.5 X EBITDA. By overpaying, you would mean paying $600,000. That is just a different multiple, 3X. And that might be the right formula for a business that is doing well in the current economy. Or for a business that has other things going for it that make it desirable. So if you trace the price back to the higher formula (3X instead of 2.5X) and if it is justified by the circumstances, it is not over paying.

Posted by: Alex Max

I agree that there's no such thing as overpaying for a business. But that assumes the buyer has all the facts and is acting rationally. Overpaying for a business without all the facts isn't called "overpaying" it is called "getting cheated" or "being stupid."

Posted by: Chaz A.

The way I see it, in fact it is by definition, what a buyer is willing to pay for a business, which the seller accepts, is the actual value of the business. So, how can you figure out what is an overpayment for a business? I don't quite understand.

Posted by: Tesse McBride

Is there really such a thing as overpaying for a good business? I don't think so. If one person realizes a business is a good one and pays "more than it's worth" then, most likely other smart buyers would do the same. And if that is the case, then the "overpay" price is actually what it's worth. Really overpaying for a business happens when the buyer has faulty information--maybe because the seller is lying, as Willard suggests. That's not the same as paying a "premium" because a business is in demand, in which case the "premium" price is the price the business is worth.

Posted by: Steve C.


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About This Blog
Peter Siegel, MBA is a nationally known consultant and author - with over 25 years experience on the topic of selling, buying, and niche financing (the purchase of), small to mid-sized businesses. His clients include: business buyers, business owners/sellers, small business advisors, and business brokers.
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