Henry Campbell-Jones, Founding Director of Hornblower Business Brokers, explains why you should avoid the trap of inflated valuations when selling your business.

Selling your business can be a challenging process and, for most business owners, it’s likely to be the first and only time that they do so.

Taking the decision to sell, and engaging the services of a business broker to determine the value of your business, is the first step into unknown territory, requiring you to subject the culmination of all of those years of hard graft and dedication to a cold, hard figure representing its worth in the marketplace.

Receiving the highest possible price for your business is the ultimate reward for a business owner to aim for. However, receiving an inflated initial valuation may negatively impact the eventual sale of your business. Serious buyers will not take the valuation seriously, resulting in a protracted sale process, where the business often ends up being sold at a lower price or not being sold at all. 

Throughout our many years of helping business owners to attain the optimal value for their businesses, we’ve gained an insight into the factors which often lead to sellers falling for high valuations. With this in mind, when assessing the beauty parade of business brokers vying to represent your business with the best possible valuation, we advise that you take the following aspects into consideration.

Follow your heart but don’t lose your head

Having your company valued is obviously a hugely significant event, and one which could confirm that its current value is attractive enough to provide for the shareholders’ retirement or alternative life plans. Alternatively, it can provide you with a platform on which to map out the growth objectives for the business to get a level of value to satisfy the shareholders’ personal goals.

With so much at stake, it’s tempting to fall for a high valuation and view this as the determining factor when selecting a business broker to work with.

However, while your heart may already be hankering after new horizons post-sale, it’s critical to keep your head focused on whether the valuation being suggested for your business is realistic and that the range of financial and non-financial factors have been considered in coming up with the valuation.

Secure a valuation based on a rounded evaluation of your business

It may seem obvious that any company valuation should be detailed and rounded, and not just based on recent financial performance. But this is a point often missed – business sellers often fall for attractive valuations without questioning what the figure is actually based on. Worse still, they use these higher valuations to measure the potential effectiveness of the broker. So beware of business brokers who offer a high valuation figure, while failing to ask questions relevant to your specific business.

The relationship between a seller and retained broker has to be built on openness and trust. This trust starts with the broker giving an informed, objective view on the market in relation to your business and the ability to ask direct and relevant questions, rather than telling you what you want to hear. It’s not as romantic a proposition as a high valuation based on superficial information but, in the long term, it will hurt a great deal less.

Make sure the broker uses a wide range of assessment criteria

To ensure you receive a meaningful and robust valuation, it’s essential that your company is assessed against a range of financial and non-financial criteria. Here are just a few of these:

  • Revenue and profit profile for the last three years and the expected forward growth trajectory
  • Current shareholder roles and the company’s dependency on these roles
  • Shareholder replacement costs and whether there is planned succession within the company  
  • Size of customer base and customer revenue concentration
  • Proportion of contracted or recurring revenue, which is particularly relevant in the facilities management sector.

Most people are familiar with the cliché that a company is only worth what a buyer will pay for it. The more elegant way to express this is that, provided a broker does their job properly, the ultimate price of any company will be dictated by the market appetite for that company.

Companies are typically not marketed with a specific market price and, instead, offers are invited from potential buyers. Even if the broker has been a little conservative in a valuation, the market will soon make this clear. It is better to have it this way than wondering why you are receiving much lower offers than you were led to believe you might!