Unrealistic Valuations: The Biggest Barrier To Selling Your Business?

25 February 2020
Advisor talking to business partners

Over the last 3 months, I’ve seen several business exits fall by the way side where the business owners had unrealistic expectations about what their business was worth. This raises two important questions. First, are business owners qualified to put a value on the business? And second, why do they continue to hold their position on value when mounting evidence shows that it’s far more than interested parties are prepared to pay?

If you’re a business owner, you know what makes your business tick better than anyone. You probably have a number in your head as to what you’d like to sell it for. But that doesn’t make you an expert on its worth to a purchaser. If you had a heart condition, you wouldn’t self-diagnose. You’d see a heart specialist. Selling a business is a serious event which for many happens only once in a life time. So why jeopardise the desired outcome by setting the valuation bar yourself, when you’ve no experience of knowing whether in fact it’s a height that a purchaser can or will jump over?

Many business owners approach business transfer agents or brokers for advice on valuation. After all, these people sell businesses regularly. They should know what they’re talking about. But it’s a bit like selling your house and going to different estate agents. You hear what you want to hear. So if one transfer agent tells you he can sell your business for at least £2 million and another tells you that you’re likely looking at a range of £1.5 to £1.8 million, who are you more likely to choose?

The estate agent and the business broker both want you to sign up with them. It’s not a formal valuation service they provide. Is it too cynical to suggest that veering to the top end or even beyond a realistic valuation range might serve their interests best? The truth is of course, nobody knows for sure what the eventual exit value will be. A house or a business is only worth what someone is prepared to pay for it. But a top end valuation does set expectations and sometimes it’s difficult to accept a good offer which is then seen in a sense as falling short.

There are a few major reasons why many businesses fail to sell. Setting an unrealistically high exit valuation is certainly up there as one of these reasons.