Selling a business can be a complicated endeavour with twists and turns in the road. Of all the reasons we see why businesses do not sell, the number one we see time and time again is business owners not pricing their businesses right from the start.
As a seller, leaving yourself some room to negotiate is understandable – but inflating the price to a level where cash flows cannot support a purchase price will almost never work. The reality is that the majority of buyers will be going to a lender for financing and lenders do not like lending if the cash flow from the business cannot service their debt. Sure, there are people out there with deep pockets that could buy your business outright, but in our experience they tend to be some of the more diligent buyers and are often unlikely to overpay (not to mention they will likely want to leverage their capital through a lender as well).
As M&A advisors, there are a number of great businesses that we are exposed to that would like to sell – but only for a premium price. Unfortunately in these cases, we often have to go our separate ways as it is unlikely we will be able to meet their pricing expectations. In every successful deal there is a ZOPA – a Zone Of Possible Agreement – where a buyer and seller’s acceptable price ranges overlap. If a ZOPA exists, there is potential for a deal. If not, no amount of negotiation will get a deal done and everyone will just end up spinning their wheels.
When pricing your business, another factor to be aware of is the debate on how to value future potential. Often we will hear something along the lines of, “my business would be worth a lot more if ‘X’ or ‘Y’ happened”. In our experience, buyers – whether they are strategic or non-strategic buyers – will value a business based on what it is currently worth, not based on the potential of what it might become after a buyer adds new value to it.
Think about this in terms of building a house: if your business was to sell building supplies and those materials sold for $100,000, you wouldn’t propose to a contractor that because they are going to turn the building materials into something more valuable, that the supplies should actually be worth $200,000! This is an overly simplistic example, but the key message is the same – buyers are unlikely to pay premiums for their own efforts and for scenarios that may or may not happen in the future. While there can be exceptions to this if there is a strong case for why future cash flows will increase (such as signing a big new contract), in the majority of cases – whether you are selling a product, service, or a business – buyers will generally view any value-add they can bring to the table as a benefit to themselves.
The good news to this story is that the majority of business owners we meet are fairly reasonable in their price expectations. Usually, our valuation is in the ballpark of where the owner would like to be. In fact, it is not unusual that the business is actually worth more than what the owner might have thought. Often times educating a seller on different ways to structure a deal may help them wind up with more money in their pocket at the end of the day, even though they may have settled on a lower price.
At Confederation M&A we are always willing to sit down for an initial discussion with a business owner. Discussing the value of your business can be a sensitive topic, but our commitment to you is to provide open and honest feedback to ensure you are maximizing your business value and setting yourself up for success.
Jeff MacKenzie, Principal, Senior Advisor