Sellers sell their businesses for many reasons, but the chief among them is money. So every M&A advisor has encountered a client with value expectations that are sky-high. Many see selling price as a sort of business report card, and they want their business to get excellent grades. It’s also common for owners to let their emotions lead the way. They’ve put in years of hard work, the thinking goes, and so that hard work should come with a handsome reward.
Here are five simple strategies for managing unreasonable value expectations.
- Acknowledge expectations upfront. This allows you to ask follow-up questions about how the seller arrived at a specific figure. Without documented comps many sellers make mistaken assumptions. Simply asking them to justify their asking price can help them become more realistic. However, things become more challenging when sellers have based their valuation on an unlikely outcome, or on a comp that’s not really comparable at all. Here it’s important to outline the specific things that must occur for clients to reach their target. Then leave it up to the seller to decide whether they’re willing to put in the work.
- Be honest and upfront. Especially when working with lower middle market and family businesses, sellers may have little familiarity with the process. Before accepting an engagement, ask for three to four years of financials, as well as current projections. Then have a honest conversation about what these financials likely mean for the business’s ultimate sale value. It’s also important to ask the seller to explain why they want to sell. Selling a business is a emotional decision, and understanding the psychological factors that go into the decisions can help you support the buyer to achieve their goals.
- Know that advisors aren’t always right. Sometimes you may be surprised by a high offer. The best deals happen when the strategic interests of buyer and seller are aligned. So understanding the interest of the seller can help you align them with the right buyer, potentially increasing value. Rather than trying to deter a client from seeking a high valuation, consider acting as a client educator. Help them understand key value drivers as a way to empower them to make intelligent decisions. Many sellers, upon realizing all that goes into a credible valuation, will defer to their advisor. Of course, it’s important to emphasize that valuation is as much art as science. So be willing to listen and learn as much as you expect your clients to.
- Use empirical data. This is less likely to trigger defensiveness and frustration in the client. The evidence should come from as many sources as possible, such as recent comps and the client’s own numbers. It’s helpful to ask the client to provide their own data, too, particularly if they have concerns about the empirical data on which you have relied.
- Know that the market rules. Ultimately, the market determines selling price. So be mindful of various market forces, and know that the winds may shift in ways you can’t always anticipate. An experienced M&A advisor will be able to provide insight on current market conditions, and how it affects the sale process.
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