Selling Your Business

People, who have the ability to connect willing buyers and sellers, practice the real art of appraising businesses.

This ability to match buyers with sellers is of far greater value than many academic-style, often-complicated accounting methodologies, e.g. Discounted Cash Flow (DCF), Capital Asset Pricing Models (CAPM), etc. 

I am not suggesting that the accounting algorithms mentioned do not offer business people any value. But rather, that they may be better suited to e.g. appraisers striving to resolve disputes related to estate/gift taxation, divorce litigation, etc.

You see, selling your business is not a lot different to selling your home.  Firstly, you can only sell it once, to one buyer.  That effectively places you at a disadvantage.  Meaning, available buyers could buy any home in your street, neighborhood, state… basically anywhere.

Having one thing to sell is only advantageous when you have something really unique, very valuable, or in demand, e.g. Google buying Nest recently, Facebook trying to acquire Snapchat, etc.

Secondly, in the USA “Certified Valuation Analyst (CVA)” implies that someone - usually a CPA - has passed a certification exam.  Much as with e.g. licensed (or certified) realtors, achieving a pass rate in a licensing exam does not result in the delivery of an expert analyst! 

Quite often, valuators will attach unrealistic and/or unachievable valuations; perhaps too high, sometimes too low.

Since you only have one business to sell, a great strategy is to find more potential buyers.  Again, much like selling your house when three buyers are bidding, this could help to drive your valuation higher. That's in addition to helping you determine the real value (i.e. what someone is prepared to pay for it).

Valuations are driven by supply and demand.  Simple stuff.  Even economists get this!

Now, simple business valuation metrics abound: businesses sell for 1x or 2x annual revenue, 10x net earnings, etc.  These metrics may complement formal methodologies, like the ones mentioned above.

But, before you spend money hiring an expert, rather talk to your competitors, clients, interested and/or associated third parties (like vendors), etc.  Do this to help pre-determine any potential buyers’ interest.  Not a core skill?  Then hire someone to do this on your behalf.  A potential buyer may be someone you already know, or even an employee(s).

The guy or gal who may be interested in buying your business will likely not show much interest in an expertly prepared DCF valuation analysis, done by someone not willing to buy a business.  Buyers would be interested in your business’ financial standing though, so ensure that your financial statements are clean, ready and available, as appropriate.

Now, think logically, e.g.:  let’s assume an expert valued your business at $10 million, and you’re delighted with this number.  Casually, offer it to this same expert for e.g. $7.5 million.

Your 25% discount offered would equal a nearly 33% potential return on investment when he sells it quickly, based upon his professionally prepared and realistic valuation, in the very near future. 

He may need to round up some friends, based on his Rolodex of ex-clients, years of valuations experience, connectivity to wealthy potential buyers, etc.  Otherwise he could arrange short-term bridge financing from a financial institution to fund this great investment opportunity!

Then, he would be able to resell the business for $10 million (or even slightly less), and generate a very healthy, and quick return on his capital investment.  After all, the sales price will be based on his expert valuation!  No different to a realtor buying an under-valued home, and flipping it for a handsome profit.

Gauge the response.  You may be unpleasantly surprised to find out that the valuation doesn’t meet his personal investment criteria as an entry point.  Of course, if he were to say yes to the $7.5 million offer, you have a potential deal… and you’re then just negotiating the price!

There are many other factors to consider when valuing a business.  My intent with this short summary is to get you thinking counter-intuitively, foregoing the herd effect when faced with challenging business, investment, and life decisions!