Warren Buffett said it best: “Price is what you pay, value is what you get.”

One of the biggest struggles with selling in the lower to middle market is business valuation expectations. The top reason for deals not closing in 2022 was due to a valuation gap in pricing.

Of those transactions that didn’t close due to a valuation gap in pricing, approximately 69% had a valuation gap in pricing between 11% and 30%. Sellers almost always feel their business is worth far more than what the market will bear. Here are a few basic reasons explaining this valuation gap:

The owner is valuing assets, not cash flows. Investors are not concerned as to what you paid for your assets. A buyer is focused on the cash that the business can generate and its risks. This is especially true with service and technology companies.
Too often, the owner is not optimizing their value/opportunities due to lack of preparation. A small investment in preparing for the transaction can more than pay for itself if properly executed.
Owner’s attachment to the Company. If the Company has paid your salary, the children’s tuition, etc., you place more value on the enterprise and may not appreciate the risks associated with the business from an outsider’s perspective.
Valuations based on the rare astronomical business successes. Examples include Instagram, Facebook and Apple - these entities are so far outside the realm of th norm that any meaningful comparison is ludicrous.
Private Equity Firms and the relatively low cost of capital have generated an unprecedented frenzy over competing for the companies with an EBIDTA greater than $5 million.
The owner is equating the valuation based on wants/needs, not on a fair market value.

Before deciding to sell your business, hire an independent, accredited business valuator to provide you with a reality check as well as means of improving the future price.