Why It May Seem Like Buyers Are Nuts Regarding Your Business’s Value

By: Patrick Ungashick

Why It May Seem Like Buyers Are Nuts Regarding Your Business’s Value

Recently we had a client go through a thorough and well-prepared process to sell his company. About 300 potential buyers were contacted — a mix of strategic and financial players. Here’s the preliminary breakdown:

  • 300 potential buyers contacted
  • 78 were interested/requested further information
  • 22 held preliminary phone calls with us
  • 9 made an initial offer

If we pause right there, the story might seem strange to many business owners. Only nine out of about 300 qualified buyers made an offer for this profitable, growing, and well-organized company. That’s 3%, which means 97% passed.

To many owners contemplating selling their company, to have so few potential buyers actually step up and make an offer seems surprising and more than slightly disappointing. Yet these numbers are quite typical.

The vast majority of potential buyers at any point in time will not pursue buying your company if contacted because they don’t see a strong fit, are occupied with other acquisitions, are undergoing internal leadership changes, are conserving cash, or any number of other reasons.

Buyers (Usually) Aren’t Crazy, They’re Just Very Different

But this typical client’s experience got even nuttier once the offers came in. Here are the nine offer prices listed from lowest to highest:

  1. $5.9 million
  2. $8.0 million
  3. $12.2 million
  4. $12.3 million
  5. $14.1 million
  6. $14.5 million
  7. $17.5 million
  8. $20.8 million
  9. $32.5 million

How does that happen? How can nine potential buyers, all of whom can do math, produce offers that range from a low of $5.9 million to a high of $32.5 million? Are some of them crazy or incompetent? Are the low offers unjustifiably low — or are the high offers dangerously excessive? Or both?

What is going on here? This company had consistently strong earnings, was growing, and was well led. Why was there so much variation in the buyers’ perception of business value?

Buyers are not crazy — usually. And these results are common. What your company is worth varies greatly from buyer to buyer because each buyer comes with a unique set of needs, challenges, strengths, opportunities, and priorities.

These differences lead buyers to conclude widely different valuations when offering to purchase the company in question. For example, the two buyers with the highest initial offers ($20.8 million and $32.5 million) both had excellent distribution systems and saw a massive opportunity to take our client’s proprietary products into their existing markets, generating highly profitable growth through cross-selling.

The remaining other potential buyers either did not see the same opportunity or were not in a position to capitalize on it. Out of the lowball offers, one potential buyer saw little value in our client’s company beyond its asset base. Another low offer came from a buyer that seemed internally disorganized and thus could not get its act together.

The point here is that buyers are not nuts, they are just very different. Their differences often translate into different conclusions on your company’s value and subjective worth to them.

3 Key Takeaways for Owners Expecting to Sell Their Company

There are several important takeaways for business owners expecting to sell their company at some point in the future. They are listed below, in no particular order, along with additional educational resources from us to help you learn more.

  1. Very rarely does it pay to talk to just one buyer at a time because without any comparison, you cannot know if that one buyer is your best option or not. Unfortunately, many owners make this mistake. Buyers know this and try to lure owners into these one-way situations. Watch our webinar to learn more about this issue and to learn when you can safely talk to just one buyer.
  2. You must be prepared to run a thorough sales process in order to find your best buyer. This webinar has several real case studies that demonstrate ways to find your “unicorn” buyer.
  3. While buyers have different needs and priorities, most buyers agree that certain characteristics make a company more or less valuable. For example, a company that is growing and has a diversified customer base will generally be seen as more valuable than a similarly sized company in the same industry that is shrinking and has a narrower customer base. To learn about 25 factors that can drive company value, download this free tool.

Ultimately, the sooner you start preparing for exit, the more time you’ll have to maximize value in your company and find your best buyer. Contact us to discuss your situation and learn how we have helped other business owners maximize their business value.

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