Do businesses sell at the price they are valued at?

For the big companies great swings in valuation although not unknown are rare, however for the mid Market Company there are many examples of poor valuation.  These are due either to poor planning or poor advice. So do businesses sell at the price they are valued at?

When an owner is putting their business on the market it is usually necessary to get a professional evaluation.  The result of this valuation is a very extensive report which values the business to a particular figure or narrow range.  This final figure is a weighted average of various factors including what sector of industry the business is in, what the financials are like, how strong the management team is, the assets, the reason for sale and so it goes on.

What should the seller expect?

So, is this a fair evaluation? Should the seller expect to get the valued price of their business? Not usually.  There are lots of assumptions that go into a valuation report, some of which are more subjective than others.  The most important value for someone who is going to buy a business is how successful the business will be in the future, what its potential for growth is and what the effect of companies that merge has on their operating income.  Of course these can never be known, as there are so many factors that will affect these outcomes and everyone will make a different assessment.

As well as a valuation of the business itself, the terms of the sale also affect the price paid for a business.  These terms include whether there is training, what the payment schedule is, reps and warranties and whether there are earn outs.  These can make as much as 40% difference in the final deal.

It is unlikely that a business will attain it’s valued price without these sale terms.  The price of selling a business relies heavily on the amount a buyer is willing to pay and it often depends on what an acquirer is looking for.

Maybe surprisingly, the reason for a sale can also have an effect on the price.  If a buyer understands that the buyer is in need of selling quickly, then they may just think they can get a lower price just by waiting long enough.  Having competition prevents this and in general enables a business to sell at a higher price.

The buyer and the sale process

These two factors then, the buyer and the sale process, have a great deal of impact on the final selling price of a business and anyone selling their business should be aware of this.  In order to make the optimum deal, you need to do a lot of research and negotiating.  Although it takes time to go through the competitive bid process, the benefits make it all worthwhile.  It is important to plan early and find experienced professionals to help thoroughly optimize every part of the sales process.  Without this support, it is unlikely your business will reach anywhere near the range of the professional valuation.

In summary

It is very important to plan a business sale carefully and not in a hurry if you want to get the optimum deal. So that your businesses sell at the price it is valued at. Preparation of your business to get a good professional valuation is only half the story.  Some of the major factors in getting a good price for your business depend on the terms of the sale, the reason for the sale, finding the right acquirer, who sees the potential in the business and having competition.  Specialists in Mergers and Acquisition can help to get these factors in place and have experience in finding the right clients for your business.

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