The Challenge of Sorting Valuation Realities From Fantasies

Think about that last lunch or conference where you met a new friend or an old business connection, and over dinner or a drink you were told that your business is absolutely worth 6-8x EBITDA. Effortlessly, you calculate a quick number and begin to dream of your future exit with this reward in your pocket.

For many business owners, the prospect of selling a business is like the classic dream of how you would spend millions from winning the lottery. You hear that large number, and then your mind kicks in and for a few moments you are lost in the fantasy of spending that winning sum.

But then you confront the realities of the market when you prepare to actually exit your business, and you are told your business is more likely worth 3-4x EBITDA.

The question to consider is whether you want to hear a sugar-coated message or be told the honest realities of the market. Granted, these market realities can play out in both directions. You may find that your business is worth more than you expected, but more often business owners get locked into a higher exit value that doesn’t align with the market.

When faced with this challenging dilemma, some owners are so committed to the original number they have in their head that they decide to wait in the hope that the market will catch up to their expectations.

Be careful with this strategy. If waiting takes you outside the realities of the broader market cycles, you may face the necessity of having to work and manage your business much longer than you anticipated. Just ask some of the business owners who were determined to wait and finally readied their business for an exit in 2008. Some are still in the game trying to drive value back into their businesses.

A better approach may be to first consider the qualitative, rather than just quantitative, goals that you’d like to realize from the sale of your business. Consider the lifestyle you are seeking, or your retirement aspirations, and prioritize what matters most to you. You can then work backwards, perhaps with the help of a financial planner or other professional advisor, to determine the exact value that would satisfy all of your goals.

The bottom line: what you want or think you need in the sale of your business has to be realistic and aligned with market realities. If not, your overall exit strategy may be in jeopardy.

The fact also is that business size drives different valuation results even if you are in the same industry vertical. Just because you heard that a competitor who is in the same industry, but is significantly larger, sold for a strong multiple of EBITDA, doesn’t necessarily mean that your smaller business will sell for a comparable multiple.

My last word of advice: be wary of the investment advisor or broker who agrees with everything you say about the value of your business and is immediately prepared to bring your business to the market at exactly the price point you want.

Unfortunately, this tactic all too often has the investment advisor/broker hoping that the market will drive the price point down and that the stresses of selling will have you cave in to a lower offer. This isn’t what you hire a professional investment banking advisor to do.

If you want the most productive exit strategy, find an advisor that will give you fact-based market information, constructively offer recommendations that will enhance business value, and help you do all of the needed preparatory work to bring your business to the market with high confidence in achieving the value that you both desire and can actually achieve.