The price paid for a product line (or a business) is typically determined by a return on investment (ROI) calculation. The buyer estimates the future benefit stream from the product line and then determines the required rate of return that is needed to entice them to purchase it. The required rate of return is a function of how risky the future benefit stream is. If the future benefit is in doubt or risky, the required rate of return will be higher. There is an inverse relationship between the required rate of return and the value of a product line. Our job as business valuators is to determine what the future benefit stream will be and what is the proper rate of return required for that benefit stream.
Whenever you are considering selling a business or a product line it’s important to get a true value by using a professional business evaluation. Usually the seller does not have any experience selling a product line or a business, and not knowing all the facts could cost tens of thousands of dollars. The buyer may be very sophisticated. There are many complex issues in addition to negotiating a price in a transaction that should be considered, such as the terms of a deal and the purchase price allocation.
The terms include whether the price will be paid in cash or by a note or stock. If there is a note, the question becomes “Will this note be secured?” “Are there conditions required to be met by the seller to be paid?” and “How long will it take to pay back?” Purchase price allocation is critical to any deal. It can be the difference between paying a 15 percent tax rate on your gain or 40 percent tax rate.
As you can see, there are many considerations to selling a product line or business. Don’t attempt to navigate the complex area of business transactions alone.