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Beauty is in the Eye of the Beholder

Submitted by John Brown on Fri, 11/13/2020 - 8:00am
beauty

In this blog post, we unveil an example of a business owner who is attempting to put their business on the market while assuming the value of their business. Luckily, this business owner has a trusted advisor to help clear up any confusion and suggest the necessary steps to take before contemplating a sale. 

Thomas Ryder, an experienced Exit Planner, was a bit taken aback when his client, Brian Alpert, announced, “I’ve decided to sell my business.”

Typically, Ryder’s clients signal their intention to sell when they ask him to review a letter of intent or purchase agreement.

Thomas’s first response was, “That’s great news! Tell me more.”

“Well, my business is worth around $6 million,” responded Brian. “I can sell it and net almost $5 million. That and my $1 million in investments will give my wife and me plenty to live on. I’ll keep you informed as the deal progresses, but at this point, all I need from you is the name of an attorney to draft the papers once I’m ready to move forward.”

Thomas said, “Let me first ask you a couple of questions, if I may. How did you arrive at $6 million as the value of your business?”

“I’ve been keeping track of earnings before interest, taxes, depreciation, and amortization (EBITDA) multiples in my industry as well as reading what the Merger & Acquisition Market is doing,” Brian explained. “It seems like a six multiple is appropriate and our EBITDA this year will be almost $1 million.”

Thomas suspected that Brian’s multiple was too high and that his business was worth significantly less than $6 million. He knew that if Brian put his company on the market now, it would be costly, time-consuming, and likely end in failure. As an experienced advisor, Ryder also knew that overestimating business value (an exclusive focus on top-line price) is one of the “Deal Killers” he has been trained to avoid. After years of working with Brian, Thomas understood that only an expert-based valuation could overcome Brian’s assumption about his company’s value. 

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“Can I suggest that we get a more definitive understanding of the value of your business before you move forward?” Thomas asked.

“I don’t think so,” Brian responded. “I just don’t want to spend the $15,000 to $20,000 it would cost to undergo a professional evaluation.” At this point, most advisors would end the conversation because they realize that no matter how valuable an accurate business valuation is, most owners won’t spend the money to get one.

“No problem,” Thomas assured Brian. “I have a number of valuation experts—including an experienced investment banker—on my advisory team. I suggest we ask him to provide us an estimate of the likely sale price for your business. He won’t charge you anything.”

Brian leaned forward, “Really? I don’t see any downside to that!”

In our next article, we’ll find out whether Brian’s assumption about the value of his company was correct and whether it is the only assumption that is off the mark. 

Takeaways

  • Owners consistently overvalue their companies. At the same time, most are unwilling to invest the money to get an accurate valuation. 
  • Many Exit Planning advisors, often with BEI’s help, create their own teams of other professionals that include business appraisers, investment bankers, and business brokers. These team members provide, at modest cost, accurate estimates, and/or valuations to counter the first hurdle to Exit Planning.
  • Owners need an expert’s assessment of the value of their business before they can be persuaded that they need to do more pre-sale due diligence.


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