In the competitive world of business sales, owners often face a harsh reality when it comes to the valuation of their businesses. As a seasoned business broker, I frequently encounter business owners who are disappointed by our valuation. This discrepancy between reality and expectations leads some to believe that by shopping around for a broker who will appraise their business at a higher value, they can ultimately sell it for more. However, this approach is fraught with risks and misconceptions.
A key point that business owners must understand is that the pool of potential buyers remains the same, regardless of the broker handling the sale. If a business is overpriced, it tends to deter serious buyers, leading to a stagnant listing that wastes time and resources for all parties involved.
A recent troubling example comes to mind. I disovered a business I had evaluated listed for $100,000 more than my recommendation. Upon closer examination, I discovered that the listing agent had inflated the discretionary earnings by $30,000. This misrepresentation can lead to some unhappy outcomes.
- A savvy buyer uncovers this discrepancy during the due diligence process and withdraws from the deal or possibly demands a significant price reduction.
- The issue comes to light post-closing, resulting in a disgruntled buyer and the risk of legal action.
The pursuit of a higher valuation can also lead business owners into the trap of engaging with inexperienced or unethical brokers. Those willing to inflate valuations may lack the necessary expertise or may prioritize short-term gains over ethical business practices. It’s crucial for sellers to understand that brokers are not purchasing their business; our role is to facilitate a fair and transparent sale process.
The overarching lesson here is the importance of realistic expectations and ethical practices in business sales. “Don’t shoot the messenger” aptly summarizes this situation. A lower-than-desired valuation from a broker is not a slight against the business but rather a realistic assessment based on market dynamics and financial metrics. Business owners would be well-advised to approach the sale process with a clear understanding of these factors, avoiding the pitfalls of overvaluation and the subsequent consequences it may bring.
The author Anthony John Rigney is Broker/Owner at Quorum Business Advisors. If you would like to know more about our services please contact us today for a free consultation.