In public company investing, there is an old adage: “Don’t fight the tape.” It’s a reminder that regardless of how strongly you believe in a stock’s value, the market ultimately sets the price. The same rule generally applies to the sale of your private business: the market determines the value of your business, not your accountant, your lawyer, or your country club pals.
Many business owners have inflated views of the values of their businesses. In some cases, that is due to expectations based on past performance or a sense of value based on the decades of time and energy building the business through many ups and downs. In other cases, it is due to a lack of understanding of the variables upon which businesses are valued.
Before beginning a sale process, take the time to understand how the market will value your business. Talk to people who have experience and expertise in valuing businesses similar to yours — investment bankers, business brokers, accountants and attorneys who have significant M&A experience, and other business owners in your market. Consider obtaining a formal valuation from a third-party who has expertise in valuing businesses and understands your business and industry.
With the help of your advisers, study how the market will value your business. The key factors that influence value are the M&A market conditions, values of recent sales of comparable businesses, and the key attributes of your business.
The M&A market is impacted by numerous variables including changes in interest rates, the availability of acquisition debt, financial strength of strategic buyers, business conditions within your market segment, and the general sentiment about the near-term economy. Selling during a strong M&A market will often increase the values buyers are willing to pay for a business.
Sales of comparable businesses are often the strongest indicator of how buyers may value your business. It is important to understand how comparable the businesses are — a company that is significantly larger or more profitable than your business may not be a good indication of what your business will be worth.
In addition to those market factors, the value of your business will be impacted by elements of your business, including the historical financial performance (sales growth, margins and cash flows), customer concentration, recurring revenue, management strength and breadth, and the competitive landscape. Take the time to understand the key factors for your business and proactively work to improve them in order to help achieve your desired valuation.
It’s vital to separate your personal views from the market realities. Develop an educated and reasonable assessment of the range of values of your business. At the end of the day, the market is not driven by what you think your business is worth. An offer is not a judgment of your abilities or the value of the time you have devoted to your business, but rather an objective view of market conditions and the value of the business when owned by the buyer. To achieve a successful sale of your business, get educated and don’t fight the tape. ●
Tom Littman is Chairman at Kirtland Capital Partners
