Managing Sell-Side Expectations: When a Client is Being Unrealistic on Business Valuations

Invariably, entrepreneurs almost always have a bloated sense of what their companies are worth. This mentality often gets many business owners into trouble, especially those who think they should hold when the time is right to sell. Nowhere was this more prevalent than in 2007 and 2008. With general cash-flows high and multiples flying solidly, many company owners and managers were convinced they could grow their businesses and sell in a couple more years. For those who chose to wait, this proved fool-hearty and in some cases fatal.

A Real World Example 

In 2007 and 2008 we were working with several different electrical contractors on selling their businesses. Five of eight decided to sell for what at the time were reasonable multiples and great “retirement packages” while the remaining three chose to wait. They did so for several justifications. First, most felt their businesses were worth more than the market would have paid for them, even in the best of circumstances. Believe me, nothing gets better than 2007. The second reason many chose to wait was because they felt they could grow the businesses more and perhaps get more money out of them at some point in the future. Again, not much gets better than 2007, but hindsight is certainly 20/20.

With bad timing one of the three owners are now out of business while the remaining have weathered the market trough, but came limping out the other side. Without the market’s proverbial crystal ball, it is impossible to know what the market will ultimately do in the next month and especially over the coming years. However, there are a few things we’ve found helpful in playing the true advisor to clients:

  1. Help them understand market fundamentals. Some entrepreneurs are more sophisticated than others. Understanding cash flow, industry-specific multiples and general market business valuations on their companies will be helpful in getting some owners to make better decisions.
  2. Paint a picture on what the market will bear. With the market fundamentals, we help to paint a picture on what the market will bear in best and worst-case scenarios. This means working to showcase the most recent deals which track in similar size and in the same industry.
  3. Manage general expectations. Part of our jobs as M&A advisors is to help our clients manage their expectations. Some business owners have visited “sell your business” conferences where a slick presenter has told them their business is worth two to three times what it’s actually worth and what the market will fully bear. We work as true advisors. If we think a business is undervalued according to what we’ve seen in the market, we’ll be the first to inform of the good news, but most often we’re the bearers of harsh reality and must work to un-train those who were expecting to get more in the sale of their business.

Here we sit, four years after one of the biggest market crashes and bubbles in a generation now with much more street-savvy education behind us thanks to recent experience. Our job as investment banking consultants is to help business-owners manage expectations by understanding and owning the true value of their companies. We always hope for a home-run and strategic buyout where multiples are higher-than-average, but generally the market plays to fundamentals.

We work in Seattle mergers and acquisitions. For more information on selling your business, please contact us.

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Nate Nead
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC which includes InvestmentBank.com and Crowdfund.co. Nate works works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He is the chief evangelist of the company's growing digital investment banking platform. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Nate resides in Seattle, Washington.
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