Research proves that the great majority of business owners delude themselves about how much their business is worth.
80% of businesses <$50M put on the market fail to sell – Tom West, President Business Brokerage Press –
And the single biggest reason for this is over-valuation by the vendor.
If you are acquiring a business or about to do so, then this research has clear implications, as does the solution I am about to discuss.
Unless you address this vendor delusion you may have to walk away from the deal. When this happens you are in what Steven Covey would have referred to as a lose – lose situation. You lose the opportunity to acquire the business and potentially grow on the investment and the seller loses his prospective buyout – and remains oblivious to his over-valuation.
Or worse, if you pay more than what the business is worth then it is a case of win-lose. A win for him and a loss for you. Worse still if you have to explain to other shareholders you paid too much.
What is required to enable the transaction to proceed to a win-win, is the injection of a dose of reality.
Of course there is no one single panacea, however we believe Valuation Guardian gets you close to a win-win situation. Interestingly enough it was originally developed as an analytical tool for performance improvement, but has since proved its value for acquisitions.
In essence how it works is that it unpacks around 3 years of accounts into a financial model that calculates an indicative value of the business based on hard facts. Both seller and buyer can then use this as a basis to form a negotiated agreement. Even the most deluded seller cannot deny the science behind the calculations.
We had a client recently who thought his business was worth $11m but when he got to the table he was told it was really only worth a little over $7.5m. Initially the deal was off. He went into denial telling us we had wasted his time and refused to discuss it further. After a cooling down period he returned to the table. With the benefit of external advice, he realised that he had been operating under a delusion for many years because a mate in the same industry had told him that the sale value of his business was a multiple of his revenues.
The end price was above $8m but not $11m. Once he accepted the valuation and could see how it was derived he crossed the line. Was a win-win for both parties and the deal was eventually sealed.
So the moral of the story is that acquiring a business starts with getting clarity around what the business is really worth, for both parties. A reality based on objective data.