Mike Rosendahl

E: mrosendahl@pcecompanies.com

Follow me: LinkedIn

According to IBISWorld, 98% of business owners don’t know the value of their business or have an unrealistic idea of its value.1 Consequently, these owners suffer from a “valuation gap” – the difference between the fair market value of a company and the business owner’s value expectations. This valuation gap is the number one reason why companies don’t sell.

Valuation Gap Influencers

There are several factors that can skew your perception of value. Here are the five most common ones.

Rumors of a competitor’s sale price

One of the most common mistakes you can make as a business owner is to figure your company’s value based on a competitor’s sale price, or more precisely, what you think is the sale price. Rumors among privately owned businesses can be very misleading. Sellers may overstate their ending valuation out of a sense of pride, or numbers can change as the information is passed from one person to the next. Aside from the buyer and seller, few people, if any, know all the facts related to the sale, including size, profitability, industry mix, management depth, intellectual property, restrictions, proprietary features and customers. Without this information, making a direct comparison is difficult and often misleading.

Media hype about a large acquisition

Headlines in the Wall Street Journal often tout the high valuations certain companies receive. While these valuations are attention grabbing, you should not use them to judge the value of your company. More than likely, published transactions are not appropriate points of comparison, for several reasons.

Industry – Valuation multiples and operating metrics can vary from industry to industry, leading to a misconception of value.

Company size – A company with over $1.0 billion in revenue will receive a higher multiple than a company with $50 million in revenue in the same industry. Typically, larger companies receive more substantial purchase price multiples.

Liquidity factor – Public company multiples are sometimes mistakenly used to value smaller private companies without any adjustments. While again the size difference negates effective comparison, a more important factor is the ready liquidity of the publicly traded stock, which provides an increase in value.

Your emotional capital

This is the collective value of all the “soft” assets you’ve invested in your company: weekends and evenings spent developing the business instead of enjoying the company of family and friends, going that extra mile (or three) to save an account, constantly striving to come up with better procedures, always stretching one more hour out of the day and one more day out of the week – the business of creating a business. While most buyers appreciate your great investment, they just don’t end up paying for this emotional capital.

Valuation without methodology

Occasionally an arbitrary number is chosen when business owners value their company. There is no methodology used in this scenario and the number chosen can float in either direction. An arbitrarily high number, which is often the norm, sets an unrealistic value that is unlikely to be met and will ultimately lead to opportunities missed. An arbitrarily low number is less common, but also leads to an adverse outcome: money left on the table. You’ll usually get just one chance to sell, and failure to realistically maximize value could have financial ramifications down the line.

Desire for a certain income to meet post sale lifestyle demands

The amount of annual cash flow a business owner requires to maintain his or her current lifestyle is often used as a metric to value the business. While it is prudent to understand your retirement requirements, this amount should not be used to determine your company’s value. The buyer is interested strictly in the company, not what you’ll be doing on a beach somewhere.

Overcome the Valuation Gap

Plan on working with a team of advisors to determine your financial needs post-sale and your company’s worth. That’s chief to overcoming the valuation gap. The team should include people you trust to carry out the pre-sale planning, transaction process and post-transaction tasks. Ideally, you’ll include an investment banker, a wealth manager, an accountant and an attorney. Together, they can help throughout the life of the transaction to ensure you’re working toward the correct set of achievable goals.

A skilled wealth advisor will evaluate post-transaction monetary requirements, based on your appetite and capacity for risk. You’ll need to consider the type of lifestyle you desire to live post sale, and decide on the purchase of additional capital expenditures such as a boat or second home.

A CPA will help you understand the tax implications of selling your business. Knowing what you can sell your company for is necessary and helpful, but the after-tax proceeds are more important. This is where the accountant takes the lead. The accountant should evaluate the proceeds under a realistic variety of scenarios to determine the structure and terms of the transaction. You can get the accountant working on this early in the exit planning process, even before you have a buyer in range. A thorough accountant will improve the proceeds from the sale and determine how to fund future objectives in a more tax efficient way.

You’ll want to conduct your own due diligence before the sale, if only to rehearse what you’ll have to go through when the buyer does his own due diligence. The importance of the pre-sale due diligence review cannot be overstated. Your attorney should take part in the pre-sale due diligence review, as should your investment banker and accountant. Your due diligence today will help avoid issues during the deal process, when it counts. By identifying issues and resolving them before the sale, value will be maintained and certainty to close is improved.

The investment banker’s knowledge of M&A trends, multiples, buyers, and value enhancers is a major factor in helping you determine what your company is worth. If the company’s value meets or (hopefully) exceeds your needs, then the choice is simply whether or not to move forward and when. If the expected proceeds from a sale don’t appear to meet your needs, then there are some important issues that you’ll need to address.

  1. You can lower your post-sale requirements and move forward with the sale of the company.
  2. You can consider a partial sale or recapitalization.
  3. You can figure out what would improve the valuation and develop a plan to get there. But if you must delay, you’ll need to understand economic cycles and industry risks that can affect the immediate future value of your company.

Understanding the value of your business and your retirement needs is critical to a successful exit from your company. Putting together a team of professionals to assist you through the journey will lessen the risk and provide sound guidance to reach a successful outcome.

1. 2014 IBISWorld report, "Business Valuation Firms in the U.S."   [2] 2017 Private Capital Markets Report – Investment Banker Survey

Largest Transactions Closed

  • Target
  • Buyer
  • Value($mm)
David Jasmund


David Jasmund

Investment Banking | ESOP

Orlando Office

407-621-2111 (direct)


407-621-2111 (direct)

407-621-2199 (fax)