There is nothing more disappointing when selling a business than the gap between the seller's desired price and the buyer's offering price. Here factors generating gaps:
- Timing issues between a “buyer’s market“ and “seller’s market.”
- The value you perceive you’ve put into a business and the value a buyer perceives they can get out of it.
- Gaps in the various approaches used to establish business valuation.
- Differences between what you need to support a retirement lifestyle and what can be extracted from the transaction at time of sale.
- Differences between the offer, what the buyer actually pays, and what the seller ultimately gets.
- Buyer’s vs. seller’s perception of risk in the future growth and earnings flow for the business.
Why These Gaps Exist
- Sellers aren’t quite convinced these gaps exist.
- Since owners aren’t convinced that the gaps exist, they are reluctant to invest resources into bridging them.
- Harvard Business School Professor Howard Stevenson states this common misperception is based on the inherent optimism and lack of knowledge of the entrepreneur.
- These issues create a formidable obstacle to planning a successful transition killing a satisfying exit experience.
- Undue optimism and lack of knowledge are extremely dangerous to an owner when they are forced to estimate:
- The current value and likely growth rate of their business,
- The future performance of their non-business assets,
- The amount of money they will spend in their post-exit lives,
- Their life expectancy, and
- How to look after loved ones in the event of disability or even unexpected death.
Typically, owners overestimate business value because they:
- Appreciate how difficult it was to start and build a business to its current state.
- Believe what they put into the business is the same as what a buyer will get out of it.
- Are bullish on future business growth and investment performance.
- Are in denial about how much money they will need in retirement to maintain a desired lifestyle.
This warped ecosystem shaped by optimism and ill-informed assumptions:
- Blinds owners to how wide the actual gaps are,
- Handicaps their ability to appreciate how long it takes to bridge the gaps, and
- Creates a toxic environment for disappointment, frustration, and failure.
Owners often use optimism and lack of knowledge as license to postpone taking the actions necessary to create the outcome they desire.
Knowing — not guessing — what you have and what you actually need is key to closing the gaps that exist.
Knowing — not guessing — what you have and what you actually need is key to closing the gaps that exist.
How to Close the Valuation Gap
The goal of a business owner when considering a sale is to achieve perfect alignment (zero gap) between the various factors. For most owners, this is extremely difficult to achieve without the help of experienced advisors. The table below shows some of the many areas that skilled advisors can address.
Note: A CBI, CM&AP (such as myself) has the necessary skills to provide a very close approximate for current business value (only the market can confirm value), business value enhancement, and market/sell your business -- while working with your other advisors to ensure a satisfying exit.
Note: A CBI, CM&AP (such as myself) has the necessary skills to provide a very close approximate for current business value (only the market can confirm value), business value enhancement, and market/sell your business -- while working with your other advisors to ensure a satisfying exit.
Selling a business is largely uncharted territory for people who have spent their lives developing processes that provide, market, and sell a product or service at a profit. But when it comes to implementing an effective process that markets and sells a business, the game changes dramatically. In nearly every case, it takes a team of experienced subject matter experts to navigate a course successfully out of the briar patch of legal, accounting, valuation, planning, and marketing considerations that are involved.
An exit advisor can address the biggest gap of all: providing an understanding and knowledge on the difference between imagination and reality ahead of the negotiation process. It takes time and experience to bring everything into alignment and owners struggle to coordinate this unfamiliar process while still running the business. It was Mark Twain who said “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”
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