Company Valuation: It’s Important to Consider Now
Business owners considering selling their business or merging it with another must understand the value of their company. Before approaching the dealmaking table, they need to assess their company’s worth objectively and not be influenced by unrealistic expectations. Knowing the true value of a business can help sellers avoid common transaction pitfalls and regrets. Understanding real market value is essential for making informed decisions, so owners should take the time to research and calculate an accurate assessment of their company’s worth before entering negotiations. To help owners gain insight into this topic, we will share the most common themes from middle-market businesses that have been recently sold.
What Can Be Learned from Previous Owners
Business valuations proved to be a critical point during negotiations. Even those that had a certified public accountant’s appraisal done for their business were still required to reduce expectations when confronted with buyers’ persuasive arguments. As a result, most ended up selling at a lower price than originally projected.
This experience resonates with former owners who emphasize the importance of properly assessing business value well before sale time – something many only recognized once they were ready to sell. In fact, one former owner shared that they had assumed they had an accurate understanding of what their business was worth but soon realized after beginning the sales process that they were significantly off.
Undervaluing a business is not typically the main problem; more often than not, it is overvaluation that causes issues in transactions. Multiple surveys conducted by the M&A sector have shown that sellers with overly inflated expectations of their company’s worth are what most commonly cause deals to fall through.
Lost Opportunities
The unfortunate truth for many business owners is that despite years of toiling and dedication, the full value of their businesses may not be realized until it is too late to make meaningful changes. Often, the opportunity has already passed before they are able to uncover the true worth of their assets, and they find that the proceeds from a sale are not enough to sustain the lifestyle they currently enjoy. To avoid such a situation, owners need to implement value-creating strategies far ahead of an eventual sale, as reaping the rewards of such strategies will take some time. Doing so can help ensure that these hard-working entrepreneurs have the means necessary to retire in a comfortable fashion.
Opposite Effect
It should not be overlooked that the amount of potential acquirers for privately owned middle market companies is limited and mostly consists of professional investors such as private equity funds, family offices, and larger corporations. This limited pool of highly discerning buyers creates limited chances of reaching a successful deal. Owners must consider all of the confidential information that must be shared with potential buyers during this process, as it would be careless to expose the business for sale with little chance of finding a buyer. Setting the value too high can also have the opposite effect. Rather than attracting a lucrative deal, buyers will be discouraged from participating in the competitive process, and this decreased demand will result in the business being sold at a lower value than it could have been otherwise.
Post Transaction Risks
As a business owner, setting an appropriate value for your company when you put it up for sale is of paramount importance. Not only will the valuation determine how much money you receive in exchange, but also the success of the entire transaction and your relationship with the buyer. If the owner significantly overpays for your business, they may blame you if they suffer any losses after closing. They may even allege you withheld material information, misrepresented facts, or defrauded them.
These allegations can be costly to fight, and no matter how innocent you are, involving attorneys will lead to expensive processes that could have been avoided in the first place. Additionally, buyers who overpay for businesses may struggle to remain solvent due to financial strain, leading to potential negative consequences for everyone involved.
These reasons demonstrate why it’s essential to properly assess the value of a middle-market business before selling it and why doing so is beneficial for both sellers and buyers alike. With accurate information on hand and realistic expectations, all parties can benefit from a successful sale transaction without facing any unnecessary legal issues down the line.
Bottom Line for Company Valuation
Business owners should be knowledgeable about how to properly value the worth of their company and conduct regular updates to ensure the best results. To maximize success when selling or merging, it is important to use realistic assumptions that reflect current trends in the industry and understand financial language. A comprehensive understanding of factors that influence business valuation can help ensure an optimal deal is negotiated, and greater profits are gained. Finally, seeking the assistance of a professional M&A advisor can make all the difference in the outcome and overall success of the deal. Not only can an M&A advisor conduct a proper business valuation, but they also provide a wide array of different services to assist business owners in selling their business from start to finish.
