No matter how sound the valuation theories are companies are valued in the real world, by real people with varied motives, amidst a dynamic market and uncertain future that no one can perfectly predict. And so entrepreneurs must focus on driving their company’s valuation by building the best business they can build, engaging with real-world investors and potential buyers, and painting a picture of their company’s future that is both expansive and credible.
Yes, there are multiples, comparables, and techniques for pricing a business, but the two most important drivers of your company’s final price are:
- its future
- competition among investors
Let’s address these one by one.
Buyers only care about the future of your company. When a potential buyer studies your company’s historical track record, reviews your financials, or interviews your customers, they are doing it to look for clues about the future prospects of your company. The quality and credibility of the picture you paint of your company’s future is the most important driver of your company’s value and final price.
In an uncertain world, the more predictable and sustainable your company’s future profits are, the more valuable it becomes to buyers, who constantly assess the risks and rewards of an investment opportunity. Many entrepreneurs get mired in the details of valuation or put their head in the sand and simply pick a number based on their personal needs or what they heard was “right for their industry”. This is wasted time.
Competition among Buyers
A credible and compelling future makes it easier to attract buyers. If you want the maximum price for your company, competition is a must-have. You will not dependably realize a fair value (let alone maximize your offer) for your business without multiple uniquely interested and credible parties at the table. It doesn’t matter if your business has been doubling in size year after year and has had record profits. If you only have one interested party at the table, you have created no competition for your business and will struggle to achieve a fair outcome. Think about your own sales process: the richer your pipeline of customer prospects the more choosy you can be about which prospects you focus on closing, and the more disciplined you can be in negotiating the pricing and terms of the customer contract. The exact same concept applies to selling your company.
Creating competition is one of the many reasons the mergers and acquisitions profession exists. A great M&A Advisor or Business Broker helps business owners drive to a fair outcome by attracting multiple interested parties that are acutely and uniquely motivated to buy your business.
As you prepare to sell your company, ignore all of the noisy free advice you’ll get and focus on two things. First is how to crisply and credibly articulate the future of your business. Second is start researching for the right M&A Advisor of Business Broker that best fits your needs and that will help maximize the final sales price of your business and not the one that provides the highest business valuation.