Every business owner has one — a number in their head that represents what they “believe” or “feel” their company is worth. Sometimes this number may be reasonable and grounded in reality. But more often than not, that number in your head has no objectively factual basis. And unfortunately, it often becomes the single biggest obstacle to a successful sale.
The problem with anchoring
Once an owner becomes attached to a specific sale price, it starts influencing every decision they make — consciously or not. If a buyer makes you an offer or an advisor tells you the value is materially below that number, you suddenly feel insulted and angry, even if the offer or valuation is an objectively strong one. And you’ll be much less willing to consider an objectively attractive proposed offer, even when – and this is important – the proposed transaction would provide more than enough after-tax proceeds to allow you to do all of the things that are important to you as you retire and transition to the next stage of life. The issue isn’t one of greed… it’s that we all anchor expectations based on emotion and selective evidence. In social psychology terms, this is referred to as “confirmation basis.” It’s the human tendency to search for, interpret, favor and recall information in a way that supports our prior beliefs or views, and – at the same time – ignore or dismiss information that might contradict our prior beliefs or views.
Business owners often anchor based on “stories” they hear from a neighbor, a friend at the country club, or a colleague or acquaintance at an industry event about recent transactions in their industry. “I heard that Steve got 9x EBITDA when he sold last year,” or “So and so paid a huge premium to acquire our biggest competitor on the West Coast.” These “stories” are dangerously misleading, and rarely –if ever – provide a complete picture. They leave out critical information that may reveal the deal to be much less attractive… for example, maybe a small portion of the purchase price was paid in cash or maybe the seller was required to retain a significant number of large business liabilities. Also, stories about “deal multiples” are easily misunderstood or misconstrued… multiples are only half of the equation… “multiple of what” is what one should ask. The acquirer may have valued Steve’s business at 9x their calculation of EBITDA, which might be meaningfully lower than what Steve’s actual EBITDA was. Using his EBITDA figure, the buyer’s purchase price might look more like 5x EBITDA. Another piece of critical information that is often missing or overlooked involves specific synergies or cost savings that the buyer might be able to realize in the transaction, meaning that the profit under the buyer’s ownership would look much greater than under the seller’s ownership.
And let’s be honest — when someone tells you about how great a deal they got, you should always assume they’re exaggerating or leaving out the messy parts. Very few people volunteer that they took a lower price for a faster close, that half their proceeds are tied to future performance, or that taxes and debt payoff took a big bite out of what they actually kept.
No two businesses are identical and every valuation is unique
The truth is that the true value of your business can only be known when you actually take your company “to market.” The value of any business is exactly what a fully-informed and knowledgeable buyer is prepared to pay after a comprehensive due diligence review of the business and an arm’s length negotiation. Every company has its own unique assets, risks, challenges and opportunities that get factored into the purchase price. Value is also often buyer-dependent. Your business may have a much higher value in the hands of one particular acquirer, but not others. And, because your business is continually changing and evolving, so too is your business value. Finally, markets themselves are not static, and the value of your business will also fluctuate with structural, technological, competitive, legal or regulatory changes to your industry or to the broader economy. Why bring all of this up? There are so many inputs to value that are entirely outside of your control. This makes anchoring a distraction, and gets in the way of doing the work that is in your control. Getting your business sale ready.
At ExitMinded, we help owners forget about the number that may be in their head and give them concrete, actionable changes and improvements to implement that will ultimately increase the likelihood of and the value of a successful transaction. That’s exactly why we’re here.