Industry statistics show that 90 percent of all companies and individuals who begin the search to buy a business, don’t follow through with the transaction. Only 20 percent of all businesses listed for sale ever sell.
Why is that?
In a Divestopedia survey, 68.9 percent of merger and acquisition professionals and business brokers reported that their primary challenge was handling their seller client’s valuation expectations. This gap between the valuation sellers feel they deserve and the valuation they’re likely to receive is a major hindrance when it comes to closing deals.
There is a way, however, to address this problem—letting fair market value bridge the valuation gap. In this piece, we take a look at how this can be achieved and how it improves the chances of a successful sale.
Maintaining Realistic Expectations When Selling a Business
No matter how perfect the circumstances may seem for selling your business, it’s important to understand that the process is complex. Most sellers don’t have real experience selling a business before. The fact of the matter is that you can go years without closing a deal.
This makes it all-important for business owners to set and maintain realistic expectations when it comes to their business valuation. The market couldn’t care less how much money you intend to save for retirement or what your investments look like.
Letting the Market Bridge the Valuation Gap
Ultimately, if you let them, business characteristics will drive the sale. Here are the four main factors you need to consider:
- Contractually recurring revenue – by far the most important and powerful factor that drives favorable prices and terms. From the buyer’s perspective, this minimizes risk by providing a predictable stream of revenue and minimal customer defections post-acquisition.
- Growth rate – Companies growing revenue at a higher rate should be valued much higher than other companies with the same EBITDA growing at a lower rate.
- Durable competitive advantage – Businesses that have established themselves in markets with significant barriers to entry have the kind of pricing power that drives selling prices up and reduce risk.
- Customer concentration – You don’t really have a business if about 40 percent of it is with one client. In other words, if your customer concentration is low, buyers will be extremely wary of doing business with you.
We’re a premium M&A business advisor that provides professional business valuation services. Our team of experts has decades of experience successfully conducting precise and thorough business valuations for our clients in the United States.
Get in touch with us for more information or call us at 1-704-892-5151.