Selling a business is a chess match

One of the first things to consider when selling your business is…”How much will a buyer pay today?”

As a business owner, that’s what you need to ask before embarking on a company sale process…because that’s what the business is actually worth. It does not matter how much you bought it for 10 years ago or what you could sell it for in the future. Or what the estimated value was during the peak of the cycle or what a previous valuation report indicated.

The value that matters is what a buyer will pay you today.

What is value based upon? 

The value is based on the business’ perceived performance in the future in the hands of a buyer. Specifically, the business value today is based on the estimate of the present value of future cash flows. Obviously, the higher the estimated cash flows, the greater the business value.

Note two items. One, no one can predict the future, so actual results will deviate from the estimates. Two, different buyers perceive the future differently and they will probably perceive the future a bit differently than you perceive it.  Therefore, values will differ among buyers, sometimes greatly.

How can you get an idea of what a buyer will pay for your company today?  

Before commencing the sale of your company, obtain a business valuation based on what the current market environment is today. It is critical to go through the exercise of estimating the value of your company. Do not skip this step.

A business valuation will give you an idea of the prices you can expect and the underlying rationale for those prices. It will provide a guideline or a range of what your business is worth…today. It will set value expectations. Then you can make an informed decision about whether or not to move forward to sell your business.

Do you need to hire a business valuation specialist to perform a full-blown (and expensive) report?

No.  Many merger and acquisition specialists or investment bankers can provide a “back of the envelope” valuation that will suffice.  It will show you, within a reasonable range, what your business is worth today.

How much is your business really worth?

The only way to truly determine what your business is worth is by creating a competitive bidding market.  If orchestrated correctly, this process will attract the right qualified buyers and push them to offer their best bids.  Then you can see the complete range of bids simultaneously and have multiple transaction structures and deal terms from which to choose.

Note important items about creating a competitive bidding market among buyers:

  • Creating a competitive market among bidders Is the only way to ensure you maximize the value of your business. In addition to managing the entire sale process, creating this competitive market is one of the most important functions your investment banker provides.
  • For public companies, an active trading market determines a company’s value. However, for private companies, there is no liquid auction market to daily attribute value to the company. For private companies, a market must be created in order to determine value.
  • A well-constructed market is composed of multiple qualified buyers. Just as with art, beauty is in the eye of the beholder when determining a company’s value – the buyer’s eye. Different buyers will have varying motivations about why they would like to buy your company and how much they are willing to pay.
  • We often seen dramatic differences in value between the high and low bids – millions of dollars of difference. That is why we are adamant with our clients about their need to run a systematic sale process if one of their goals is to achieve the highest price for their years of hard work and sacrifice.
  • Before committing to undertake the process of selling a business, you need to be realistic about price. Otherwise, if your price expectations are out of line with the market, the process will be for naught and a significant waste of resources and time. If the estimated value achieves your goals and expectations, “green light” the company sale process and move ahead. If not, go back to work and do the things that will increase the business’ value.
  • No valuation study or analysis can give you the actual market value of your company. Until you build a market and see buyers’ opinions of value firsthand, any preliminary valuation is simply an estimate.

Conclusion: Get a preliminary valuation of your business before you try to sell it

Selling a business is a lengthy and complex process. It can take six to 12 months and is very involved. Before embarking on a company sale process, get an idea of what your business is worth. This will set reasonable expectations and you can determine whether a business sale at the current time is right for you.

And remember to ask yourself, “How much will a buyer pay today?”

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