Top Mistakes to Avoid When Determining Your Company’s Sale Value
Even under the best of circumstances, selling a business is typically a long, stressful process. It will be made even longer and that much more stressful if you have unrealistic expectations of your business value. Your valuation needs to be an amount you can support with items such as documentation of past profits and cash flow and valid projections about future performance.
I have seen too many owners cost themselves time, money, and reputation by insisting on an unrealistic valuation multiple that drives away quality potential buyers. Here are the top mistakes to avoid when determining the value of your company:
1. Not getting a valuation. At any given time, most owners believe they have an accurate idea of their company’s market value, but their estimates are often colored by a lack of objectivity and a lack of information. For example, they may not be aware of a new trend emerging in their industry or the emergence of new technologies that could seriously undermine their existing business model. They are basing their valuation on gut. A valuation is based on key elements like market reality, company historical performance, and future potential. A valuation also helps temper the owner’s unrealistic expectations so he can embrace more attainable goals.
2. Basing valuation on emotions. Every owner feels an attachment to their company, but that is especially true when they started the business from scratch and nurtured it into a successful, sustainable enterprise. But all too often, I’ll see a client try to quantify their years of work as well as their emotional attachment. “Sweat equity” only results in an unrealistic sale price. In the end, the business reality is simple. The value of your company is what a buyer is willing to pay for it, and they won’t care how much work and care you have invested. They are only concerned with the results your company produces or has the potential to produce.
3. Basing valuation on intangibles. I find it a natural tendency among owners to assume intangibles like branding, customer loyalty, and reputation should have added value when it comes to determining sale price. But many of those intangible assets are being used to generate revenues and cash flow, and their value is generally already included in a normal valuation, so expecting additional payment may be a valuation double dip—a tactic your potential buyer will definitely catch. There are exceptions to this. Your company may have certain proprietary assets that are not being utilized or are underutilized. These could be processes or research and development assets whose value may not reflect correctly in your operating financials.
4. Expecting too much for future growth. It is normal for business owners to want an arm and a leg for the future growth potential of their business. Untapped potential and opportunities for growth—which the current owner chose not to pursue—can and should be used to motivate a prospective buyer and in some cases you may be able to command an upfront premium for this growth potential. But remember, this is exactly the reason why earn-outs were invented, to bridge a valuation gap. You want to maximize your company’s growth potential and the buyer wants to reduce future risk of non-performance. Don’t be surprised if a buyer demands an earn-out; just make sure you have a competent advisor to help you structure it effectively. It is crucial for you to have realistic view of your business value because the odds are once a quality buyer is turned off by an unrealistic and unjustified valuation you’ve usually lost them for good. Rarely do we get do-overs.
We help business owners determine their companies’ baseline value and then help improve that value through various strategic and tactical initiatives. When ready for sale, we leverage our extensive network of financial buyers and strategic corporate acquirers for a maximum payout.
I have seen too many owners cost themselves time, money, and reputation by insisting on an unrealistic valuation multiple that drives away quality potential buyers. Here are the top mistakes to avoid when determining the value of your company:
1. Not getting a valuation. At any given time, most owners believe they have an accurate idea of their company’s market value, but their estimates are often colored by a lack of objectivity and a lack of information. For example, they may not be aware of a new trend emerging in their industry or the emergence of new technologies that could seriously undermine their existing business model. They are basing their valuation on gut. A valuation is based on key elements like market reality, company historical performance, and future potential. A valuation also helps temper the owner’s unrealistic expectations so he can embrace more attainable goals.
2. Basing valuation on emotions. Every owner feels an attachment to their company, but that is especially true when they started the business from scratch and nurtured it into a successful, sustainable enterprise. But all too often, I’ll see a client try to quantify their years of work as well as their emotional attachment. “Sweat equity” only results in an unrealistic sale price. In the end, the business reality is simple. The value of your company is what a buyer is willing to pay for it, and they won’t care how much work and care you have invested. They are only concerned with the results your company produces or has the potential to produce.
3. Basing valuation on intangibles. I find it a natural tendency among owners to assume intangibles like branding, customer loyalty, and reputation should have added value when it comes to determining sale price. But many of those intangible assets are being used to generate revenues and cash flow, and their value is generally already included in a normal valuation, so expecting additional payment may be a valuation double dip—a tactic your potential buyer will definitely catch. There are exceptions to this. Your company may have certain proprietary assets that are not being utilized or are underutilized. These could be processes or research and development assets whose value may not reflect correctly in your operating financials.
4. Expecting too much for future growth. It is normal for business owners to want an arm and a leg for the future growth potential of their business. Untapped potential and opportunities for growth—which the current owner chose not to pursue—can and should be used to motivate a prospective buyer and in some cases you may be able to command an upfront premium for this growth potential. But remember, this is exactly the reason why earn-outs were invented, to bridge a valuation gap. You want to maximize your company’s growth potential and the buyer wants to reduce future risk of non-performance. Don’t be surprised if a buyer demands an earn-out; just make sure you have a competent advisor to help you structure it effectively. It is crucial for you to have realistic view of your business value because the odds are once a quality buyer is turned off by an unrealistic and unjustified valuation you’ve usually lost them for good. Rarely do we get do-overs.
We help business owners determine their companies’ baseline value and then help improve that value through various strategic and tactical initiatives. When ready for sale, we leverage our extensive network of financial buyers and strategic corporate acquirers for a maximum payout.
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