Selling your business is a high-complexity high-stakes process. Some transactions take months to complete. Some never complete at all.
Between preparing a firm for sale, setting expectations and terms, finding a broker, listing and promotion, buyer matching and vetting, handling confidentiality, scheduling and attending meetings, due diligence, negotiations and settlement… there’s a lot of opportunities for things to go wrong.
But with that said, it’s possible for a transaction to come together in days.
As a vendor who is at the start of the process, wouldn’t you prefer the latter option?
We’ve been in the business broking business long enough to know that you can’t accurately predict the length of any particular transaction.
But we also know that there are some pitfalls to avoid – things that will definitely lead to delay or disaster.
If you’re considering selling, you should also consider how to make the sale process as smooth as possible.
The very first hurdle to consider – and the first opportunity for a vendor to self-sabotage their sale – is tied to vendor expectations i.e. the value of their business.
The Valuation Problem
“How much is my business worth?” is a question that will always make a business broker heave a weary sigh.
It’s an impossible question, but the reason why it’s impossible is critical to the success of a transaction.
Valuation is a matter of opinion, at least until the point where a valuation has matured into an offer.
The important thing is that it’s the buyer’s opinion, not just the vendor’s.
These two opinions come from vastly different places.
The vendor’s opinion of the value of their firm will be firmly bound to its history, taking into account the vast amount of time and effort that has been invested over their working career. It may also be affected by the vendor’s requirements post-sale – particularly if the sale is intended to fund a retirement nest egg.
Unfortunately, neither of these factors is of any importance to the buyer. The buyer’s opinion of value is going to be weighted far more heavily in the direction of the future profitability of the firm, likely based on how well it will fit with the buyer’s existing business.
So, given that buyer and vendor have entirely different goals and weightings to consider when determining valuation, it should come as little surprise when they arrive at different values.
But that doesn’t help us with the central problem – no deal can be done until those values are adjusted to meet in the middle.
Getting back to the issue of smooth transactions, here’s our first piece of advice for a prospective vendor: when you’re setting your value expectation, try to see it from the buyer’s perspective.
Because inevitably that’s how the buyer will see it. And until you accommodate their needs, you don’t have a transaction.
You need to ask yourself: how profitable will this business be? What changes need to be made? When I leave, how will that affect the client base and the staff and the day-to-day management? How much risk is involved? What price is appropriate to hedge against that risk?
The reason you need to ask yourself these questions is that you need to have answers ready for when the buyers ask them… and if any of these questions don’t have good answers then you’re actually inviting the buyer to invest elsewhere.
The Reasonable Expectation
For prospective vendors grappling with the valuation problem we can offer this piece of concrete advice: don’t focus on divining the correct valuation – instead, think in terms of a process to decide on a fair valuation.
The correct valuation implies that there is a single number, backed up by an appropriately complex calculation, which can be trusted to be the right and only threshold for consideration. Take it or leave it.
This approach is guaranteed to put off even the most reasonable buyer, regardless of the actual number attached to the valuation.
Instead, focus on the fair valuation. Take into account buyer needs and allow for a variance in price. Also, be prepared to ask multiple buyers and learn their opinions on what is fair.
Ultimately it is the market that determines price in the moment. Attracting multiple buyers with a good set of initial terms and expectations and inviting them to make as many offers as possible for comparison is going to give you better and more varied options than digging in your heels from the start and ruling out buyers who don’t share your opinion of what should or should not be included in the calculation of value.
