It is, for many owners, the nightmare scenario: they think their business is worth millions, only to learn that its actual value is an order of magnitude (or more) smaller. When a person’s life’s work isn’t as valuable as they hoped, it’s easy for them to question themselves, their purpose, their future. Valuation surprises are deeply unpleasant. Sudden financial bad news is always painful, but these surprises also strike at the core of business owners’ identities. When that happens, they may take things out on their advisory team, or stop working hard to make a deal happen. The ripple effects are vast. Understanding the reasons for valuation surprises can help owners prepare for these potential challenges, and recover from them when they occur.
Most business owners have a general sense of how much their business is worth. Too often, though, emotional considerations inform this intuition. They think about how much time and money they have invested, and how much that effort is worth. They never consider the business from an outside perspective, or assess what value the company offers to a potential buyer. So they overvalue their company, and often feel extremely disappointed when a valuation expert returns a lower figure.
Lack of Documentation
Sometimes a business has the capacity for immense value. But an owner cannot document its true worth because of poor record keeping. This creates more uncertainty for the buyer, and may become a source of liability. As a result, buyers may ask for a price reduction. Owners can often repair the damage by compiling the right records, addressing any underlying issues, and trying again. When an owner cannot document their claims, though, those claims effectively do not exist, and the business simply cannot have the value the owner hopes it will.
A Struggling Business
Sometimes owners base valuation expectations on their best year, not the current status of their business. Or they had an unexpectedly great year in the midst of mediocre or poor years. Buyers want to see steady, consistent growth, and they definitely do not want to invest in a struggling business. Sometimes owners think things are going well or feel hopeful that they can turn around some difficulties, but hope is not a tool on which to base business projections or promises to buyers. When the records indicate the business is struggling, or might be about to lose value, buyers want to pay less.
A Shifting Economy
Economic winds can shift quickly, and sometimes in unpredictable ways. Consider how COVID undermined travel, or how Internet travel sites decimated travel agencies. Changing economic winds, such as a recession in the larger market or a niche-specific concern in the owner’s niche, can affect value. Owners may be able to fix this by proving their ability to be creative and flexible, rather than becoming entrenched in an old way of doing things. Businesses that could shift to an online model, for example, thrived during the pandemic.
Ultimately, owners must temper their valuation expectations with cold, hard facts. When those facts don’t reveal what owners hope they will, it’s time to get to work—not wallow in frustration. The right advisory team can help.