OVERVALUING YOUR BUSINESS WHEN SELLING CAN BACKFIRE
We have been there, our business is our baby, we spend countless hours and years growing it. As former and current business owners ourselves, we have purchased, exited, and founded companies. Although age and experience may or may not be deciding factors, it is undeniable that an exit would happen at some point in the future.
We met with a business owner after contacting him about our sell-side services. The business owner wanted to sell his computer software company focused on robotic automation technology. The company has been in business for 26 years, profitable, interesting EBITDA, and with a good management team. The need for a buyer to turnaround the stagnating growth was a necessity. Although, the owner was successful at drawing the attention of potential buyers, he was highly unsuccessful at going beyond the introductory phase.
The reason for this was the inflated idea on his business value. When presented with preliminary fair valuation range, he was shocked and became unresponsive – Valuations based on minimal financial information he provided.
The valuation range we provided him was around $6.1M to $6.7M. He was seeking 20x EBITDA, which was highly unrealistic based on comps, financials, growth rate, and other factors. His thought process was that because he had been in business for 26+ years, the value of his business should had been well over the $15M range. We understand it could be difficult to hear a valuation that differ from ours but as business owners, we keep an open-mind and recognize that if most of prospective buyers - Corp M&As and PE groups - stop communicating with us, something needs to be revised.
The business owner decided to engage another M&A advisor who claimed to have the ability to make it happen. It has been a two months since our last interaction with the owner, and from what we hear and see, no traction at all.
In conclusion, business owners should not sell their businesses mirroring a real estate sale. Overvaluing businesses in hopes of slightly lowering the sale price in the future would certainly backfire. Words spread like fire and overvaluing your business detracts premium buyers, which in time of despair will lead you to sell at a significant discount.
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