by Dave Driscoll
According to the business broker community, the main reason deals don’t close is a valuation gap between seller and buyer. The second most common reason is unrealistic seller or buyer demands.
More than 40% of businesses don’t sell because of idealistic expectations of the business value coupled with demands driven by seller emotions.
Believe me … I get it.
Owner emotion is a HUGE factor in the sale of a business, but if you let that emotion rule the day, you will end up losing—possibility forever—your opportunity to sell your business and fund your next life phase or retirement.
However, highly valuing something that you have devoted your whole being to is only natural; removing the lens of emotion is not easy. Add to that the seller’s personal fear of what a post-sale life may look like financially and you can see why a seller wants to overcompensate by asking for an inflated value for their business. Thinking you’ll just negotiate down to a realistic price means you’ve already chased away legitimate prospective buyers.
So, how do you overcome emotion when selling your business? With information and, ultimately, trust.
I know, it can be hard to place your trust in a process with so much uncertainty…
The best way to develop trust is through information. The more you as the seller understand the process of what it takes to sell a business, the more you will trust your own instincts. The more your business broker’s valuation and selling process is based on comprehensive data and proven processes, the more you will learn and the more trust you will have in yourself and the skills of your broker.
Selling your business is likely the single most significant financial event of your life. To achieve the outcome you desire, you must educate yourself and work with knowledgeable advisers who have earned your trust.
When you break down the process of valuing a business, there really is not much mystery.
Businesses are sold as a multiple of the cash flow generated by the business. So, accurately defining the cash flow of any business is critical; this is where the skills and process of your business broker are extremely valuable. Once the cash flow is determined, the collective experience and wisdom of the business broker will guide the identification of the business’s value drivers.
Beyond cash flow, what enhances or detracts from the overall desirability of the business?
Is the business in a mature industry?
Is the industry growing, stable or declining?
How completive is the space in which the business operates?
How easy is it to enter the business?
How stable is the profitability of the business?
These factors and other unique circumstances determine the overall desirability of the business through the eyes of the buyer.
Finally, a weighted market value of the business is calculated by connecting the cash flow with the results of the value driver analysis, along with a multiple of cash flow guided by research of comparable segment deals.
As you can see, the market value of a business is based in data, information and facts. Not emotion! The statistics above demonstrate that, sadly, owners themselves can be the biggest obstacle to the successful sale of their businesses.
Advice from a seasoned business owner and business broker:
Educate yourself about the process of preparing a business for sale and maximizing value. Select a business broker/M&A adviser who explains his/her valuation process in detail and then listen to your head rather than your heart.
Dave Driscoll is president of Metro Business Advisors, a business brokerage, valuation and exit planning firm helping owners of companies with revenue up to $20 million sell their most valuable asset. Reach Dave at DDriscoll@MetroBusinessAdvisors.com or 314-303-5600. For more information, visit www.MetroBusinessAdvisors.com.