If you are a business owner, nobody is going pay you for what you put into the business—they will only pay you for the value they believe they can get out of it. Yet when it comes time to sell their business, many sellers have unrealistic ideas of what their business is worth and what the market will pay.
Those who refuse to alter their thinking despite specialized advice to the contrary, usually wipe out their chances of selling.
True Story – The Danger of the Wrong Business Valuation When You’re Selling Your Business, recounts a cautionary story where that is exactly what happened. The author, Trevor Wilson, says that the names are fictional but the story, based on a business in North America, is true.
Dave (the business owner) and his wife simply refused to believe the numbers that were being presented and the valuation approach that was being used. Consequently, Dave turned down what was considered a legitimate purchase offer.
As the article notes,
The buyer ended up buying another printing firm in a nearby community. For a while, Dave stopped talking to the broker and was angry with all concerned. The original broker was equally upset and he stopped pushing or promoting Dave’s business.
Worse, with the economy still very soft, and with his growing reluctance to sink any more money into the business, sales for Johnson’s Printing & Graphics were going to drop considerably below the $800,000 mark for 2011—the first time it had done so in 10 years.
The article goes on to describe the personal toll the situation had on Dave and his wife. Not a happy ending.
Rejecting valid offers from potential buyers
Sunbelt London office owner Erik Twohig describes another scenario, a nightmare for competent buyers.
This is where someone – usually an unqualified party, makes a verbal representation to a seller about wanting to pay “X” for a business. “X,” of course, is unreasonably high, and the transaction never moves forward. This number “X” is now, however, firmly embedded in the seller’s mind as the ‘right’ price for the business. For some period of time into the future, reasonable buyers will suffer the fate of rejection by the seller until such time as it finally sinks in that “X” was nothing more than a fantasy.
Sometimes an early offer is the best.
I’ve seen a seller get a good offer for their business within two weeks of it being on the market, then turn around and put on pricing conditions that end up killing the sale. Nine months later, they are wondering why it hasn’t sold—until they realize it wasn’t underpriced to start with.
A business is only worth what a buyer will pay and what a seller will accept.
The business broker knows the market and the thinking of both parties. It pays to respect their advice.