By James S. Cassel
For middle-market business owners thinking of selling their businesses, it can be easy to make a common — and costly — mistake: having the wrong valuation expectation. Influenced by hearsay and news reports of high valuations related to larger businesses and mega mergers and acquisitions, they develop overinflated expectations for the value of their own companies. As a result, they put themselves in a position of becoming disappointed, wasting time and resources, and missing opportunities.
Business decisions must be made using facts rather than emotions or
unfounded assumptions. Based on my experience working with middle-market business owners, here are some of the common factors that can negatively impact or shade their judgment. All of these are easily avoidable.
It happens all the time: Business owners hear that people they know or companies in their industries received high values for companies. Sometimes the reports are true; other times, they are fiction. In either case, business owners draw inaccurate comparisons and conclusions about what they can expect to get for their own companies. When anyone tells you they sold for a high value, do not assume this is any indication of what will happen when you sell your business.
First, you should confirm whether those sellers really received those values. Sometimes it is impossible to obtain this information. People often embellish.
If they really received those values, you must determine whether your business
is positioned to get a similar value, and you should identify the considerations and preparations necessary to secure the highest possible value.
Did those people you know sell early to consolidators who paid a premium, and now that those consolidators have completed those acquisitions, do the consolidators no longer need to acquire your company at a premium? Did you make a mistake by not selling first?
You must know how to accurately compare your business to those other businesses. Are your revenues the same? Do you have the same profitability and margins? Can your potential buyers find synergies by eliminating costs, consolidating parts of your business, or implementing new measures to achieve greater efficiencies? What have your key growth drivers been? Good advisors can help you navigate these questions.
Every company and industry is different, and while it is important to compare yourself to others, you must recognize the differences between your company and similar ones so you can properly assess your own situation. Additionally, timing can impact the valuation you can achieve.
For example, while Burger King and McDonald’s both franchise restaurants that sell hamburgers, they have different business models. McDonald’s owns or secures long-term leases for its franchise locations and Burger King does not. This affects restaurant performance levels, thereby affecting value.
Moreover, companies in different industries have different valuations. Tech companies can receive higher multiples than distribution companies because they have higher margins, profitability and, in many cases, greater growth.
Some business owners also get too emotional, their perceptions become clouded, and they fail to understand true valuation. Some think they should set the sales price of their companies based on the amount of money they need to maintain their current lifestyles. This is not a realistic approach.
Like it or not, here are the facts: A business is worth whatever a ready, willing and able buyer is willing to pay for it. Buyers want to pay what your business is worth today and not what it will be worth in the future. Buyers also generally do not want to pay for synergies: They want synergies to be among the advantages they gain in the acquisition.
Sellers also make inaccurate assumptions when they neglect to consider expense factors that may affect the companies’ profits after the sale.
Buyers will consider these factors when determining how much they are willing to pay, so you should consider this upfront and plan accordingly. For example, if you get business because your company is minority and/or woman-owned, what will happen if you sell and these advantages are lost?
For middle-market business owners thinking of selling their businesses, it is important to work with trusted professionals who can provide sound guidance as to value and process. Do not blame the messengers if they do not say what you want to hear. Everyone on the seller’s side wants to sell for the highest price, but to maximize values it is important to be realistic and use sound decision-making. Otherwise, you run the risk of missing valuable opportunities to sell your business at a realistic price to legitimate buyers.
James Cassel is co-founder and chairman of Cassel Salpeter & Co., LLC, an investment-banking firm with headquarters in Miami that works with middle-market companies.
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