As a professional business broker for the last 15 years, I have had the pleasure of visiting with hundreds of prospective business sellers. They have had one thing in common—the common thread is that they think their business to be worth more in a sale than it actually is. The real problem is that sellers are disappointed when they hear the real value and are often unprepared for the final result.
Oftentimes, the “wish” price is more than double its worth to potential buyers. Sellers talk to business brokers or valuation experts until they find the one that says what they want to hear. Similarly, it’s like the heart patient interviewing doctors until he finds one that tells him that he doesn’t need surgery. Fortunately, there are several “do not” suggestions that, if followed, will help to manage the seller’s expectations before the selling process actually begins.
1. Do Not Listen To One’s Peers
Listening to a colleague’s experience in selling his business can be misleading. Many times the “colleague” who has sold his business doesn’t relay ‘everything’ that happened in the sale. He will either inflate the terms or price to boost his ego, thereby misleading the seller. The Mergers &Acquisitions professional is the only person that the seller should listen to who can lay out the true value of the business.
2. DO NOT PLACE VALUE IN “RULES OF THUMB” FOR VALUATION
Each industry segment has rules of thumb that are specific to that particular industry. However, there are no accurate rules of thumb for selling a business. Each deal is different as to asset base, staff, historical performance and demographics. While there are standards to business valuation, the prospective seller should wait until a valuation professional has completed a thorough financial recast before determining the “street” value of his firm.
3. MANAGE EXPECTATIONS
The worst thing a seller can do is have an inflated value in his head before starting the selling process. In many instances this unrealistic value causes the seller to become un-negotiable from the onset. Accepted business valuation techniques rarely, if ever, use industry rules of thumb in developing a selling price. The accepted valuation technique for small businesses is the cash flow multiple (and those multiples are based on the specific financial performance of the business being valued) not an industry rule of thumb. The problem is that rules of thumb are general in nature and not specific to each individual business.
4. KNOW YOUR TAX LIABILITIES BEFORE THE SELLING PROCESS BEGINS
Many sellers do not account for or understand the tax liability of the sale. It is important to get as much as realistically possible at the closing table; but it is equally important in how much the seller retains after paying taxes the year following the sale. The business owner should seek CPA council regarding tax implications on selling his business before starting the process. For example, a “C” corporation owner may be advised to sell on a stock basis; rather than an asset basis.
In summation, business owners need to do their homework before starting the process to sell their business. It is important for sellers to understand how businesses are professionally valued. Owners should only take advice from M&A and tax professionals, and keep an open mind about what their business will actually be worth on the open market.