Avoiding Unrealistic Expectations of Value in a Business Sale

Oct 9, 2018

IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities.  Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses.  The following blog has been provided by Kelly Deis of Soundpoint Consulting (www.soundpointconsulting.com).

Avoiding Unrealistic Expectations of Value in a Business Sale

Most business owners do not have a realistic idea of what their businesses are worth. Owners almost always think that their business is worth quite a bit more than the market would likely bear. There are several reasons for this.

  1. Emotional Ties: Owners are personally and psychologically tied to their business. This is particularly true for long-running family businesses.

An owner has poured their heart and soul into their business. Where others may see a mundane business, owners – like proud parents, see their business as an apple of their eye. This emotional tie may cause a disconnect with the realities of the market.

  1. Lack of Analytics: Most small business owners do not have a grounding in the analytics which determine a company’s value.

Sadly, I have run across several owners who negotiated a purchase price for their businesses with their gut, and ultimately overpaid. Now, they are hoping this is the baseline for the current valuation. Not surprisingly, this is not a criterion for prospective buyers. Most buyers value a business based on its cash flow. The original purchase price rarely – if ever, is a factor.

  1. Needs-Based: Some owners reverse engineer the value of their business based on the amount they want/need.

This is a bit like the tail wagging the dog. A knowledgeable buyer certainly won’t over-pay for a business in order to fund your retirement.

  1. Unproven Success: Early stage or high -growth companies may not have proven their business model yet.

Remember, in most cases small businesses are bought based on historical performance, not projections. To profit from investments made to grow the business, you should count on three years of sustained performance at the elevated levels.

At the end of the day your business is only worth what a buyer is willing to pay. Absent that, a formal valuation not only helps to set expectations, but also educates the owner on the variables which impact value.

While getting a valuation which is significantly less than one had hoped can be very discouraging, recognizing the factors driving value can also be empowering. And, positively influencing those factors can lead to a higher valuation down the road.

If you have questions relating to business valuation, Kelly Deis, CVA, CEPA and President of Soundpoint Consulting, a business valuation and consulting firm specializing in business valuations, exit planning, strategy and operations business consulting, and financial services for marital dissolutions, would welcome inquiries. Kelly Deis can be reached at 206.842.4922, or kelly@soundpointbusinessconsulting.com

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, and mergers & acquisitions community on subjects relevant to the purchase & sale of privately held companies and family owned businesses.  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.