What are Comparable Sales (Comps)?
The Short Answer
Comparable Sales (Comps) explained simply
Comparable sales, often called "comps," are a key tool in business valuation. They involve looking at businesses that have recently sold and are similar to the one you are trying to value. "Similar" means they are in the same industry, have a similar size, location, and financial performance. By analyzing the sale prices of these comps, you can get a good idea of what your business might be worth. It's like looking at what houses in your neighborhood recently sold for to price your own home.
Real-World Example
The Coffee Shop Comp
Imagine you own a coffee shop and want to sell it. You find three other coffee shops in similar neighborhoods that sold in the last six months.
- Coffee Shop A: Sold for $200,000, had $70,000 in annual owner benefit.
- Coffee Shop B: Sold for $250,000, had $85,000 in annual owner benefit.
- Coffee Shop C: Sold for $180,000, had $60,000 in annual owner benefit.
By looking at these comps, you can see a range of values and how they relate to owner benefit. This helps you set a realistic asking price for your own coffee shop.
Why this matters
Comps matter because they provide real-world evidence of what businesses are actually selling for. They help you understand market demand and set a realistic price. This makes it easier to sell your business and helps buyers feel confident in their offer.
When looking at comps, make sure they are truly comparable. Small differences can have a big impact on value. Focus on businesses that are as close to yours as possible in every way.
When looking at comps, make sure they are truly comparable. Small differences can have a big impact on value. Focus on businesses that are as close to yours as possible in every way.
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