The Value Gap
by Kelly Deis of SoundPoint Consulting
The value gap is the difference in price between what the seller thinks his/her business should sell for and what a buyer is willing to pay for it. Bluntly, it is unrealistic expectations on the part of the seller.
Sadly, it is one of the bigger reasons why deals go awry in the lower-to-mid market tier. And, it can be avoided.
Causes of the Gap
Financial Needs (or Wishful Thinking)
The problem is that you do not know the circumstances of the transaction.
Were the terms favorable or unfavorable to the seller? Are the two businesses truly comparable in size, capital structure, management depth and competitive position? Was it a buyer’s or seller’s market at the time of the transaction? Was the company a particularly good fit for that particular buyer? You get the idea.
Unless you know the details of the business and transaction (highly unlikely if the company is private), there are just too many variables that could make the transaction (and implied valuation) irrelevant for your company.
No. A buyer doesn’t care how much you spent. Your investment is your sunk cost. A buyer only cares about how much they will make for the investment (and risk) they are about to make. When they purchase a business, that will be their sunk cost and it will be up to them to make a return on that investment.
Bridges for the Gap
Avoid the Gap
In fact, most experts recommend having a business valued every other year (annually for larger businesses) in order for owners to track and maximize the business’ value.
A thoughtful valuation will give the owner a deep understanding of the company’s value. And, if completed early enough, there is time to increase the business’ value by implementing value enhancement strategies before the sale.
Not only will the ultimate value better meet the owner’s financial needs and expectations, but it could also lead to more interested buyers and cash (more favorable terms) upon closing.
Kelly Deis is president of Soundpoint Consulting, based right here in Kitsap County. She earned an MBA at the Wharton School, and offers services as a Certified Valuation Analyst and Certified Exit Planning Analyst. She also helps clients develop a differentiating strategy.