This post is about one of my 45-second pitches at my BNI Chapter, BNI City Business. You can read the introduction to this collection here.
This is what happens when you don’t prepare well enough in advance: cheap likes!
I had prepared a slide on another topic, but then saw a post from my former business broker company with this headline (or something like it). So on Thursday night, which is very last minute, I put this slide together. I had a message I wanted to get across (basically, how to manipulate the message through the bad application of statistics), but couldn’t find a suitable image.
So I went down the easy path and use pussycat porn: Everyone likes a picture of a cute kitten.
Business Valuation Trends
It is important to understand the basis of the statistics like this – and they have the same cautions as we see in the residential real estate market. If you take the average sale value of all the businesses sold by a nation-wide brokerage in a year, and then compare that to the average for the previous year, you will undoubtedly see a difference. On this basis, a statement along the lines of NZ Small Business Prices are up x% This Year can be made.
But the statement doesn’t tell the whole story. What are the sample sizes? Have outliers been removed, or are they included? Is the data comparable, year-on-year?
The comparability of the year-on-year sales is a real issue here.
What the data is actually saying is that the average of the sales closed this year is x% higher this year than last year. Does this actually reflect an increase in the value of businesses?
Perhaps it means that – maybe due to a shortage of stock – businesses are overpriced at the moment. Does that mean it’s a good idea to buy in this market? Probably not. If supply and demand have caused an increase in business sale prices, it means the fundamental ability of the business to generate a proper return has not changed.
That businesses have higher valuations today works in the interests of vendors (and, of course, brokers), but not for potential buyers.