The Liquidity of the Market Affects Business Valuation

A fundamental tenet of the law of supply and demand is having a willing buyer and a willing seller agree on a price. Business transactions may occur in different types of markets, which will affect the business prices agreed upon by a willing buyer and a willing seller. It is the job of the professional business broker to ensure as liquid a market as possible for the offered business. A liquid market – as opposed to a thin market – will ensure a sufficient number of buyers are exposed to the business for sale (and other businesses for sale), and avoid severe price volatility.

Defining A Thin Market for South Florida Business Sales

A thin or narrow market is simply characterized by a very low number of buyers and sellers. Because there is not enough buyers or sellers in a thin market, prices will not be in balance and will be extremely volatile. Not enough buyers results in lower demand and hence a lower price for whatever is being offered. A chief cause of having not enough buyers is often not having enough sellers. When there is not enough sellers, buyers will want to go where they can shop around and sellers can not compare what they are selling with similarly situated sellers. A thin market lacks transparency and does not give accurate information on true market prices.

Example of Selling A Business in A Thin Market

Some sellers of businesses sometimes try to sell a business on their own by means of a ‘For Sale by Owner’ (or FSBO).
One of the main problems with this type of attempted sales process is it usually results in a very thin market for the offered business.
Let us suppose that Don owns Don’s Plumbing Service and wants to sell his business and retire.
Don decides to sell the business himself, and tells his friends and family members to be on the lookout for a good buyer.
He also calls his colleagues in the plumbing industry to see if they would be interested.
Moreover, he mentions the sale to select employees and hopes one of them may make an offer.
At his wit’s end, Don may also place an ad in a plumbing trade journal hoping to attract a buyer.
A big problem with Don’s attempt to sell his business is his creation of a very thin market for the sale.
Although Don may think otherwise, he is advertising the business to a very small and local group of buyers.
Further, there are few if any other plumbing companies for sale being offered to Don’s buyers, so Don has no way of comparing the value of his own plumbing business to others for sale.
The possible buyers of Don’s company also have no way of comparing the value of Don’s business to other plumbing companies for sale.
In short, Don is trying to sell his business in an illiquid market.
No one has relevant information of the current market prices and the business is being advertised to a very small and limited set of buyers which results in extreme price volatility.

Defining A Liquid Market for South Florida Business Sales

A thick or liquid market is defined as a market with many buyers and many sellers, resulting in sufficient volume so that price volatility is lessened. Selling a business into a liquid market is far more likely to let the seller of a business receive the best possible purchase. With a liquid market, a seller of a business can much better determine the fair market price by observing the sale of similar businesses. Moreover, a liquid market with many sellers results in more buyers (and more buyers results in more sellers). More buyers will result in more demand for the business and hence a higher price with less volatility. The seller will not be pigeon-holed into one or two buyers when negotiating the purchase price. Rather, the seller in a liquid market will be able to receive feedback and possible offers from a wide array of buyers from all over the world.

Example of Selling A Business in A Liquid Market

In re-examining the sale of Don’s Plumbing Service, let us now suppose that Don wisely chooses to locate a professional business broker in order to sell his business.
The business broker should properly market and advertise Don’s business (confidentially without disclosing the name or specific location of the business through a blind ad) in as many markets as possible.
Such online business marketplaces are bizbuysell.com, businessbroker.net, businessmart.com, mergernetwork.com, and bizquest.com.
By attracting a large world-wide network of buyers, and by being advertised in a market with many sellers (including similarly situated plumbing companies), Don’s business is now advertised in a liquid market.
Don and his broker can now see what other plumbing companies are selling for, and conversely, potential buyers can now compare the value of Don’s business to other plumbing companies for sale.
There is now some degree of price transparency, and a wide array of possible buyers means that Don will have a far better chance of realizing the full value of his business.

Business Sales Should Be Conducted in Liquid Markets

A liquid market means more buyers and more sellers, with price transparency and less price volatility. A seller of a business should not fear a marketplace with other competing sellers of similarly situated businesses for sale. Such a marketplace actually means more buyers (who are attracted to the sellers) and an efficient means for both buyers and sellers to ‘shop around’ and understand the correct value of the business. At the end of the day, selling one’s business by use of a professional business broker within as liquid a market as possible will result in the best possible purchase price.

Give Martin at Five Star Business Brokers of Palm Beach County a call today for a FREE evaluation of your business.