Don’t Have Steve Ballmer’s Money? How to Avoid Overpaying When Buying a Business

Experts largely agree that Steve Ballmer overpaid for the Los Angeles Clippers.

The former Microsoft executive paid a record $2 billion for the franchise. By comparison, the Milwaukee Bucks sold for $550 million earlier this year.

On paper, the Clippers are not worth the high price tag. In fact, Forbes estimated the value of the franchise at $575 million. However, basketball teams do not come up for sale very often, and they have become a popular investment for the super wealthy.

For potential purchasers who cannot afford to overpay, it is imperative to conduct a thorough valuation. In fact, when buying a business, determining a fair price is the first step to negotiating the best deal possible.

Below is a brief summary of two common valuation methods:

Asset Appraisal

Assets to inspect and appraise include inventory, sales and office supplies, and fixtures and equipment. To obtain an accurate assessment, you often need to hire an expert or appraiser. Intangible assets such as intellectual property and goodwill should also be taken into account, as they can greatly influence profitability. IP may include patents, trademarks, trade secrets, and copyrights, while goodwill refers to a company’s ability to generate above-normal profits based on its reputation, location, employees, etc.

Business Financial Review

Prospective purchasers should obtain as many financial documents as possible, including current balance sheet, profit and loss statements, tax returns, audited financial statements (if feasible), and accounts payable and receivable. Publicly available documents such as tax liens and UCC-1 forms can also provide valuable information, such as outstanding business debts and ongoing litigation. Determining the future profitability of a business is far more complex than valuing its assets; however, it generally provides a clearer picture of your return on investment.

Steve Ballmer’s offer was likely intended to blow all of the other bids out of the water. He did not plan to engage in a lengthy negotiation process. However, for most potential business purchasers, there will be time and room for negotiation. Once you have gathered all of the pertinent information and arrived at your valuation, you can use it to negotiate a final purchase price.

That price often includes variables that are structured into the deal to bridge the gap that often appears between what the purchaser is willing to pay and what the seller is willing to accept.  For example, given today’s low interest rates and low returns on bank deposits, purchasers can actually sweeten the deal with time payments that can serve to defer taxes on the profits from the sale, and pay interest rates as low as five percent.  Sellers may also be willing to take back ten or twenty percent of the equity in the business, with a future “put” if that equity at a fixed or variable price, depending on when executed. There are a number of other creative structures available that we have used in arranging for the meeting of the minds necessary to the purchase of a business.