7 Deadly Sins of Selling a Business: 1. The First Deadly Sin—Unreasonable Expectations of Price and Value

Most business owners believe they know what their company is worth. As they may have worked to build the business, often from the ground up, they feel that their intuitive value conclusions accurately reflect the fair market value of the firm. In many cases, they are biased in their views towards the firm, and therefore, have an inflated sense of value associated with the business. Their value may differ substantially from the value that could be realized in an arms length transaction between a willing buyer and a willing seller. Without a formal valuation of the company, the owners of a business often have nothing other than a gut feeling to support the value that they attach to the business. Many are reluctant to hire an independent valuation professional to conduct an initial valuation of the company if they do not perceive the need for one. However, the valuation helps to set reasonable expectations for the business owner who has a preconceived notion of value in their minds. The valuation sets a fair market value that may be realized in a transaction between a willing buyer and seller.

In addition, an independent valuation from an appraiser not affiliated with the business broker or any of the business’s other advisors provides an objective opinion of value that is useful in negotiating a transaction price. An independent valuation gives the acquirer of the business a level of confidence that the value conclusion is not biased by the owners or their advisors. This is extremely useful when negotiating transactions from a goodwill, time, and tactical standpoint. Furthermore, a history of periodic or annual valuations (typical for larger businesses) may provide the owners and business broker with a foundation for negotiating even more favorable deal terms. It is not uncommon for the business owner pursuing a sale of the business to require additional financial analysis services from a business appraiser during the sale process. This financial analysis may involve updates to the original valuation based on changing circumstances after the initial report, analysis relative to potential synergies and the impact on value to a strategic buyer, industry analysis and/or research, financial modeling, fairness opinions as to offers and the structure of an offer, or financial analysis for use in supporting a counter offer to a prospective buyer. This additional analysis is beneficial to the business broker and business owners in supporting their negotiating position. In addition, the independent nature of the analysis and valuation from the business appraiser, who has a familiarity with the company, is helpful in raising the confidence of the prospective buyer, who may be reluctant to accept the claims from just the business broker and the owners. Consequently, the financial analysis services offered by a business appraiser are useful in negotiations in situations where an initial valuation was not performed. In addition, the prospective buyer and sellers may agree to utilize the services of the independent business appraiser to be the final arbiter of valuation disputes arising during negotiations. This allows both sides to remain amicable when negotiations become tense. Should the buyer acquire a majority interest with the owners retaining a minority interest until a future buyout, on-going analysis and valuations by the independent appraiser are crucial in ensuring a positive goodwill between the parties moving forward.

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