The following quote by Warren Buffett summarizes it well: "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. Sellers always feel their business is worth far more than what the market will bear. In a recent study, 58% of brokers believe sellers' unrealistic expectations is the main hurdle in transactions today. Here are a few basic reasons explaining this valuation gap:
- The owner is valuing assets and 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 his value / opportunities due to lack of preparation for the transaction. A small investment in preparing for the traction can pay for itself several fold over 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 prospective;
- Valuations based on the rare astronomical business successes, i.e. Instagram, Facebook and Apple. These entities are so far outside the realm of the 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 EBITDA greater than $5 million; and
- The owner is equating the valuation based on wants and needs, not on a fair market value.
Before you contemplate selling your business - hire an independent accredited business valuator to provide you with a reality check as well as a means of improving the future price.