Top Mistakes When Selling A Business, Part 3: Overvaluing Your Business

Aberdeen Advisors M&A: Angry money man

In this series of articles, we are going over the top mistakes business owners make when considering selling their business (make sure to read Part 1 and Part 2 if you haven’t done so). Whether you are seeking to generate finances for another business venture or are simply looking forward to retire, you should plan the sale of your business very carefully. It is true that a good company almost always sells; however, there are certain mistakes that can reduce your chances of landing a lucrative deal, or result in not being able to sell the business at all.

These mistakes should be addressed well before beginning the process to sell the business. The third deadliest mistake a business owner could make when selling their business is being unrealistic about its value. Surprisingly, not many businesses have current and accurate business value estimations. This can be especially problematic when you are trying to sell your company and have to ascertain a reasonable selling price. Some business owners may even ask for less than what their business is worth.

The Trap Of Overvaluing Your Business

Many owners grossly overestimate the true value of their business and set a steep asking price. This is the very mistake we are exploring in this issue. We jokingly like to call this mistake “The Emperor Has No Clothes!” Pretending your business is worth a certain amount and expecting the prospective buyers to go along with it is rather naïve.

Your asking price determines the fate of your business sale. Asking for way more than what your business is really worth could be the kiss of death for your hopes of a successful exit. A business owner may have a number in mind that they think they need to net, but this fixation may quash the chances of a fruitful deal. The owner may become obsessed with an exaggerated value; however, most savvy buyers can tell from afar that the business is not worth what the owner is asking.

The owner’s personal opinion on the worth and valuation of the business does not count much out in the real world. The market demands quantifiable proof! This can be tricky, if you have a romantic notion of what your business deserves and how much money you should make by selling your precious company. This dissonance between false expectations and reality only causes the sales process to take longer than necessary, that is, if it ever takes place.

How Should You Value Your Business?

When it comes to setting an asking price for your business, there of course are no limitations nor restrictions. You can go as high as you want! However, overconfidence in the selling power of your business can prove detrimental to your selling chances. If the price is too high, the market will not take you seriously and the prospective buyers are not likely to further investigate the opportunity. The process of selling your business may stop before it even starts.

We’ve seen many business owners headstrong when it comes to a certain idea around the value of their business, but this idea was unfortunately not grounded in the reality of ever actually selling to a qualified buyer. You may believe your business should sell for top-dollar. However, believing does not make it so. Be pragmatic! Wishful thinking has no place in business. You need to price your business right, attract the right buyers and get a fair and sensible deal.

Honesty is pretty much the best policy when it comes to selling a business. A little exaggeration does not hurt, does it? Well… actually, it does. At some point during the selling process, you may be tempted to inflate numbers, distort projections or even cover up problems to make your business seem more attractive. Don’t do it! Even if the embellishments land you a lucrative deal, you can expect some unwanted consequences in the future.

Misrepresentations, even unknowingly, raise red flags when prospects review actual finances of the business, and such misrepresentations can become the basis for legal action after the sale. If your main goal is to sell your business and move on, a long and hard fought legal battle does not get you quite the intended results. Legal cases do not come cheaply either. Honestly stating the worth, value, and market standing of your business before selling it can save you much hassle.

Most sellers have no intentions to mislead and misrepresent; they are simply out of touch when it comes to market reality and have unrealistic expectations. There is nothing illegal about asking a higher than normal price, however, we are not sure that this is the right strategy. Most buyers will simply move on to the next business for sale if they believe the seller has unrealistic price expectations.

How To Avoid This Deadly Mistake

You have to give buyers their due respect and credit. It is highly unlikely that a person or a company is going to buy a business without a thorough background check. Getting the necessary relevant information to estimate the value of a business is not very difficult anymore. In this “information age,” buyers are able to source all types of data within minutes. Key stats of your business could be at their fingertips. They know what your business is actually worth!

With key information in the buyer’s hands, the seller is reducing their chance of success by asking for a price that is “out of the ballpark” and then not being willing to come off that price. There is nothing wrong with being smart and focus on your business’s strong suits to land yourself the best possible deal, however, being fixated on a certain number and not showing the willingness to change your expectation and the asking price even slightly can prove to be counterproductive.

The asking price must not come from within the owner’s mind. Market is what dictates the value and consequently the asking price for any business. Many financial and operational factors ultimately determine the value of your business. Therefore, the real key is being more flexible and knowledgeable regarding the existence of market multiples for your business. Knowing what is driving down the value of your business can help you fix the issues and hopefully increase your business’s asking price.

Being rigid simply won’t cut it. It is important to realize that if you want to successfully sell your business, you will have to keep the changing economic and financial conditions in mind. Offering some incentives to sweeten up your deal is not going to hurt your chances either. In today’s tough credit markets, a seller should expect to offer some seller financing.

In order to land at an attractive valuation from the moment the business is placed on the market, the business owner should consult with qualified advisors who will guide them through the valuation and the intricacies of the entire sales process.

In the next article, we’ll explore yet another mistake business owners make when selling their business, along with some tips on how to avoid it.