Valuation. The word itself is enough to produce a reaction out of the most level-headed CEO. The price paid by a potential buyer is often viewed as the value of the time, sweat, and toil you’ve put into your business over many years. It’s a culmination and reflection of your efforts and is inevitably tied up in your self-image and ego.
It’s no wonder then that the discussion around valuation can be one of the most contentious parts of an acquisition negotiation. Business owners constantly want to know “how much is my business worth?" There are things you can do to get to the bottom of that question and handle negotiations in an impartial and unemotional way.
The answer to this question is easy: your business is worth what someone will pay for it! Seems obvious enough but there is a lot of nuance in that statement. Figuring out who “someone” is and what form their payment comes in is not a straightforward task.
Each potential acquirer may have different reasons for wanting to buy your business.
A strategic acquirer might be looking to increase their capabilities in a particular field or sees substantial opportunities for cross-selling your product to their customers. Maybe you have a patent portfolio that would protect them from pending litigation. Perhaps you’re a new, strong competitor and they are looking to retain their hold on the industry. All of these will change the valuation given to your company.
Similarly, a private equity firm might see your company as the starting point for buying other business in your industry or might want to fold your company into another one of theirs. Maybe you have a killer feature that their portfolio company is missing.
__But how do you actually come to a dollar figure? __
Before you start to discuss valuation with potential buyers, it’s important to do your research. First off, talk to other folks in your industry who have recently sold their company to see if they can disclose approximately what multiple they sold their company for. Secondly, find the thought leaders in your industry and discuss with them. They may be able to connect you with folks who recently sold or have a good idea of what valuations people are getting.
It’s also worth taking calls from private equity firms and other potential buyers in the year leading up to your planned sale to ask what sort of multiples they are seeing in the market. Some firms will talk to dozens of people a week and have a great idea about what people are paying and willing to pay in the market.
If you still don’t feel like you have a ballpark estimate of valuation after this research, it might be a good idea to get an independent valuation done. Obviously, valuation is more of an art than a science but having an independent estimate will give you a starting point in your negotiations with a potential buyer. Make sure whoever is taking a look at your company has experience in your industry and is active in the M&A world.
Now that you know what the industry is generally saying about the value of your business, the fun part starts: having the actual conversation about valuation with a buyer
In discussions with a potential buyer, it’s important to bring up valuation shortly after getting to know one another to make sure you are both in the same ballpark. Nothing build animosity like doing weeks or months of due diligence only to discover that buyer and sellers aren’t even close on valuation.
Furthermore if you have “your number” that you need to sell the business, make that known. If it is reasonable, folks on the buy-side can structure a deal to get there.
If you don’t have an exact number, sharing your ideal transaction type (all cash, cash + equity, etc.) can help the buyer start to think about what an offer might look like. Feel free to ask what they are seeing in the market and where they generally make offers.
Overall, if you keep the conversation very straightforward, it’s an easy one to have. A lot of potential acquirers, including all private equity firms, talk about valuations all day long so they are used to it.
Bringing up money the first time you meet someone can be awkward; you’d never ask someone how much money they make on a first date. However, by doing your research beforehand and bringing up the conversation in an unemotional way, you can save a lot of heartache down the line if a potential acquirer you’ve gotten to really like makes you an offer you feel insulted by.
Valuation is tricky but there are a lot of things you can do to make sure the people who are looking to buy your business recognize your hard work.