How to Manage Unrealistic Expectations of Value

How often do sellers have unrealistic expectations of their company’s value? What’s the best way for a buyer to approach them early in the process and address their concerns?

Todd Nelson, Capstone Valuation Advisor, answers:

This is a common issue where sellers hold high value expectations for their businesses. While price is not the only factor to consider when buying a business, it certainly plays a key role.

Keep in mind is that many sellers divesting a business for the first time may not understand their company value. For many, this business is their “baby,” so they may have very high expectations.

We counsel clients selling a business for the first time to go through a pricing analysis to gain a realistic understanding of the company’s value before they speak with potential acquirers.

For buyers, the way to address this issue directly with a seller is to clearly present your assumptions in your valuation model that has been developed with appropriate methodologies.

For example, the seller may believe their business is worth $20 million, but you only think it’s worth $11 million.

Walk through your valuation model with the seller. If you’re doing a DCF (discounted cash flow), show how you arrive at a value of $11 million when you discount the seller’s cash flow back at the proper rate and that is what you think the business is worth. Using the market approach, demonstrate that according to the market comps and multiples their company is worth about $11.4 million. These two methodologies should show that the business is worth around $11 million – not $20 million.

Of course, you may be willing to pay more for the company because of the strategic value or synergies you expect from the acquisition. And there are many factors other than price that may convince an owner to sell.

By presenting a sound analysis that involves reason, logic, and assumptions based on industry standards you can sometimes overcome a seller’s high expectations of their company’s value.