Archives for March 2025

In Divestopedia’s article, “The Myth of Fair Business Valuation: What Professional Valuations Don’t Tell You,” author Chak Reddy is quick to point out that the “type of buyer and method of sale are two important (yet often overlooked) value determinants when finding a starting price for your business.”

Reddy brings up some excellent points.  One notion in particular that every business owner should be aware of is that there is “NO fair value for illiquid assets.”  He points to the fact that between January 2007 and March 2008, the historic Bear Stearns went from a value of $20 billion dollars to just $238 million.  In a mere 14 months, Bear Stearns lost most of its value.

Additionally, the article points to the fact that business owners often suffer enormously from “dramatic valuation compression.”  In Reddy’s view, this compression is the direct result of poor planning and a failure on the part of business owners to select the right advisory teams.

Reddy believes that professional valuations can be quite lacking.  He feels that they are “contingent on multiple assumptions,” and that the valuations are only as good as the assumptions upon which they are based.  In other words, professional valuations can be limited and flawed.  In particular, he points to the fact that two of the most important factors in valuations, future growth rate and operational synergies are “highly subjective and no two views on these topics are likely to be identical.”  Summed up another way, valuations are inherently a matter of opinion and perspective.  Reddy feels that a seller will be “lucky” if the real sales price comes within 10% to 20% of the professional valuation.

In the end, as always, it is the market that determines value. It is the acquirer who will determine the value more than any other factor.  The perception of the buyer will play a key role in the process and, further to the point, no two buyers will perceive the business exactly the same way.  In other words, valuations can be tricky and certainly do involve a personal element of the individual who is appraising the business’ value.  Adding to this point, Reddy states, “From our experience, the type of buyer and the type of sale skew the valuation to such an extent that it is unwise for a business owner to not be familiar with these variables and their impact before the beginning of the sales process.”

Ultimately, finding the right buyer is essential and this is where a business broker can prove simply invaluable.  And finding that right buyer may take time.

Copyright: Business Brokerage Press, Inc.

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Divestopedia published a rather insightful article, “Letting the Market Bridge the Valuation Gap.”  In this October 2018 article, Dave Kauppi dives in and explores how fair market value can be used as a way for business owners to “bridge the gap between the valuation they feel they deserve and that which they’re likely to receive.”  This, of course, increases the chances of a deal actually taking place.  Let’s turn our attention to some of the key points in Kauppi’s informative article.

Understanding the Reality of Selling a Business

One key point is that only a low percentage of businesses actually sell on their first attempt.  The article points out that a mere 10% of businesses that are for sale are actually sold three years later; this is a simply brutal fact.  Few facts, if any, help underscore the value of working with a business broker more than this point.  Selling a business can be difficult under even the best of circumstances.  The process is complex, and most sellers have never actually sold a business before.

Divestopedia believes that it is critical for business owners to have realistic expectations regarding valuation.  As the article points out, the market doesn’t care “how much money you need for retirement,” or how much you’ve invested.

Four Points to Consider

According to the article, it is important that business owners understand that a few business characteristics will ultimately drive the sale.  There are four key factors to consider: contractually recurring revenue, durable competitive advantage, growth rate and customer concentration.

There is a lot packed into these four points, but here are a couple of big takeaways.  In terms of customer growth, if a large percentage of your business is derived from a single customer, then that is going to be seen as a problem.  As Divestopedia points out, if your company is dependent and partially dependent on a single customer, then you can expect a lot of pressure for you, as the business owner, to stick around a lot longer to ensure that this key customer isn’t lost.  If intellectual property, such as software, is involved, then things can get even more complex.  In the end, determining value in technology-based companies can be more challenging.

In the end, working with a seasoned business broker, one that understands valuation and how best to get there, is a must.  You want to receive the best possible price for your business.  An experienced business broker will help you understand how to navigate the complex process of determining a price.  However, and most importantly, a business broker will help you achieve a fair market value, so that your business doesn’t remain unsold for years.

Copyright: Business Brokerage Press, Inc.

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Pepperjam CTO, Greg Shepard recently published “Planning Your Exit Should Begin When You Launch” in Entrepreneur magazine.  In this article, Shepard puts forward a variety of thought-provoking ideas including that entrepreneurs should be thinking about partnering early on with those they believe will ultimately want to buy their business.

Thinking Ahead

Much of Shepard’s thinking centers around the fact that a large percentage of startups end in acquisitions.  In particular, he notes that in 2017, “mergers and acquisitions accounted for 93 percent of the 809 ventures capital-backed exits, yielding a total of $45.6 billion in disclosed exit value.”  Not too surprising, he also points out that according to a recent Silicon Valley Bank survey, over 50% of all startups are “hoping for an acquisition.”

For this reason, Shepard points out that entrepreneurs should be thinking about who may potentially acquire them from day one.  In particular, startups will want to build their companies in such a way that they will be attractive for acquisition at a later date.

Making one’s startup attractive for acquisition means thinking about such details as the Ideal Customer Profile, Ideal Employee Profile, and Ideal Buyer Profile.  This will help startups build the most attractive acquisition friendly company possible.  According to Crunchbase, exit opportunities frequently present themselves well before a company’s Series B funding.

Building Successful Strategies

Startups simply must understand who their customer is and why their particular product is attractive to that customer.  Likewise, having the right kind of employees with the right kind of training and know how is key.  Hiring the best talent is definitely a way for a startup to make itself more attractive for a potential future acquisition.

Shepard believes that once you understand your customer and have the right team to support your vision, you’ll want to focus in on companies that are most likely to be interested and construct an “optimal buyer pool.”  Finding this optimal buyer pool means finding businesses that serve similar markets and then making sure that your product, as well as your business model, both address an overlooked need within the existing customer base.  Combine all of these variables together, and your company will be more attractive for an acquisition.

Let Innovation Drive You

Another key point in Shepard’s article is that startups will want to provide products or services that potential buyers are currently not providing to their customers.  Additionally, he states that “Disruptors should seek out companies that are truly driven by innovation-perhaps those that have already established or partnered with innovative labs or accelerators.”

Ultimately, it is critical for startups to understand where they could fit within a larger organization.  Understanding this will help entrepreneurs make their company more acquisition friendly.

Copyright: Business Brokerage Press, Inc.

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