What Is Your Company Actually Worth?
Buyers and sellers perceive a company's worth a little differently. Here's why you might not be seeing eye-to-eye.
A business owner’s decision to sell is typically based on his or her perceived value of the business. Based on our experience, this number is typically not accurate — it could be worth more or less.
If you’re a business owner contemplating a sale, making the mistake of misjudging the valuation of your company can be costly.
Here’s what you need to know:
Why Business Owners Misjudge Value
The complexity of private company valuation along with the difficulty most owners have in remaining objective when valuing their companies are the two primary reasons owners come up with values outside the range the market is willing to pay.
Despite years, if not decades, of becoming an expert in your industry that does not mean you are practiced in determining a mid-sized business’ value. Unlike large companies—whose value can be determined on a daily basis by the price of their stock—a private company’s value depends upon a multitude of varying factors.
Furthermore, all the time and money you’ve invested into your business means that you’re probably not going to view your company through an objective lens.
To a buyer, your company is essentially an asset to be acquired for the lowest price possible while securing the highest upside possible. To you, it’s probably the most valuable thing you own—your life’s work and your path to retirement. This gulf in perception is often quite difficult to bridge during negotiation and can lead to a failed transaction.
Advisors Negate These Problems
To avoid attempting to sell your company with a misjudged valuation and, therefore, a bad starting point for negotiation, you should consider hiring a middle market sell-side advisor.
1) You can focus on increasing controllable valuation factors.
There are certain factors that you have control over to help ensure a good valuation. Showing growth in EBITDA, sales, gross profit margins, customer growth and employee skills are just a few.
As the business owner, you must be focused on these factors to the greatest extent possible in the months leading up to a sale. You’d be surprised by how much weight recent business indicators can have in a negotiation.
Hiring an advisor who can handle the details of putting your company on the market and getting it sold allows you to do this.
2) You’ll get an extensive pre-sale review of your business.
Ensuring that your company’s financial standing is as good as possible while estimating its value in an objective manner is one of the skills of a sell-side advisor. They’ll take an exhaustive look at the financial health of your business and give you recommendations for improvement based on previous transaction experience.
An advisor will be able to not only ensure that your company’s financial statements are in order, but predict what a potential buyer will use to drive down a negotiated sale price and prepare accordingly.
3) You’ll have experienced negotiator on your side.
The true difficulty in getting the sale price that you want for your business is not only in establishing a valuation, but also being able to effectively manage the due diligence process and ongoing negotiations leading up to settlement.
Buyers know that one of the primary objectives of sell-side advisors is to create an active market for the seller’s company. That being said, experienced buyers know they have to be willing to negotiate in good faith and submit their best possible offer if they expect to successfully acquire your business through a competitively run sell-side process.
The truth is, establishing the value and negotiating the actual sale price of your mid-sized business is much less predictable than it is for large companies. Your company likely differs from the competitors you compare it to and its sale will be different than others in your industry.
It’s essential that your unique situation is analyzed effectively so that you can properly prepare to sell your business for the best price possible. Starting the entire process off on the wrong foot with a misjudged valuation will only lead to difficulties down the road.