What is the difference between a business’ value and the deal price? Plenty!!!
Why is it two buyers for your business will have very different prices they are willing to pay? The answer is the buyer who has the most to gain will pay the most money. This sounds obvious, but if we understand each buyers’ future benefit of ownership, we can focus on those buyers who have the most to gain and therefore will venture the most money.
Price is negotiated whereas Business Valuation is an average or adjusted consensus of all of the buyers and sellers who have closed transactions. Valuations do not consider each buyer’s unique value drivers nor should they.
Earnings are a key consideration when determining value. An adjusted earnings figure (adjusted to normalize the existing expenses and eliminate unusual or discretionary expenses) is compared to databases of closed transactions of businesses in the same industry and with similar revenues. Adjusted earnings are then multiplied by an appropriate “multiple” that is derived from comparable sales. The results are an estimate of how much an average buyer should be willing to pay for the business opportunity.
A buyer’s earnings may differ from the seller’s adjusted earnings depending upon such factors as: access to raw materials, overhead, capacity, operational structure and customer base… just to name a few.
Synergy exists when the buyer has advantages over the seller that will result in more cash flow from the same dollar of revenue. When a synergistic buyer’s cash flow exceeds the seller’s adjusted cash flow, the negotiated price (if artfully negotiated) will invariably be higher than the value an average buyer who lacks synergy can justify.
The goal then becomes finding the most synergistic potential buyer, entering into negotiations and hoping they are in an acquisition mode at the time that the seller desires an exit. All of this should be done without the competitors, customers or employees becoming aware of a sale.
Don’t get me wrong; I am not suggesting valuations do not benefit a business owner. We have performed hundreds of business valuations over the years. A valuation should be considered a very valuable tool that enables a business owner to plan for his or her eventual exit from their company.
The actual price at which a business will sell depends not upon history, but the market conditions prevailing at the time of the sale and the individual buyer’s unique value drivers, access to cash and risk tolerance.
They say, “The best thing about owning your own company is that you cannot be fired; unfortunately, you cannot quit either.” You will know when the time is right. Keep a working knowledge of your company’s value and plan your exit.