For many business owners, deciding to sell is the culmination of years — sometimes decades — of hard work. It is therefore understandable that the value they place on the business can be very different from the value a potential buyer is prepared to pay.

New research from Dealsuite’s M&A Monitor highlights just how significant this issue can be. According to UK and Irish M&A advisers surveyed, a seller’s own valuation creates an obstacle in approximately 49% of sale processes. In around a quarter of those cases, the valuation gap ultimately causes the deal to fall through.

That makes valuation one of the most important issues to address early in any business sale.

Why sellers and buyers often see value differently

A business owner does not look at their company purely through a financial lens.

They see the years invested in building it, the risks they have taken, the relationships they have developed and the opportunities they believe still lie ahead. In many cases, the business also represents a significant part of their personal identity and financial security.

A buyer approaches the same business differently.

Their focus is typically on future cash flow, profitability, growth potential and the risks associated with achieving those returns. They will also consider how dependent the business is on its current owner, the strength of its management team, the reliability of its customer base and the level of investment required after acquisition.

It is therefore not surprising that the two sides rarely agree on a number immediately.

Dealsuite’s research indicates that the average gap between seller expectations and buyer valuations can be around 23%. On a significant transaction, that difference can amount to a substantial sum.

Why unrealistic expectations can become difficult to unwind

The earlier a business owner develops an expectation about what their company is worth, the more firmly that number can become established.

An owner may have heard what another business sold for, applied an industry multiple they found online or discussed a target figure with family members or business partners. Once that figure becomes the expected outcome, accepting a lower — but more realistic — valuation can feel like a loss.

This is where early professional advice can make a significant difference.

A realistic valuation does not mean undervaluing the business. Instead, it helps the owner understand how a buyer is likely to assess the company and what factors will influence the eventual price.

It can also identify areas for improvement before going to market, making the business more attractive and potentially increasing its value.

The accountant’s role in preparing for a sale

Accountants are often among the first advisers to hear that a client is considering selling their business.

That conversation may take place months or even years before a formal sale process begins. This creates an important opportunity to help the owner establish realistic expectations at an early stage.

Good preparation may include reviewing:

• the quality and consistency of earnings;
• recurring versus one-off revenue;
• customer concentration;
• reliance on the owner or key employees;
• working capital requirements;
• historic and forecast profitability; and
• any risks or issues that a buyer is likely to identify during due diligence.

Understanding these factors early gives the owner time to address weaknesses and present the business in the strongest possible position when the time comes to sell.

Valuation is not just about a multiple

Business owners will often hear that companies in their sector sell for a particular multiple of EBITDA or earnings.

While multiples are useful benchmarks, they are only part of the picture.

Two businesses with similar turnover and profits can attract very different valuations depending on factors such as growth prospects, customer retention, management strength, recurring revenue, margins and the amount of risk a buyer believes they are taking on.

The question is therefore not simply, “What multiple applies to my industry?”

A better question is:

“How would a buyer view the quality, sustainability and risk of the earnings my business generates?”

That is ultimately what drives value.

Closing the valuation gap before it becomes a dealbreaker

A valuation gap does not automatically mean a transaction cannot happen. Buyers and sellers can sometimes bridge differences through negotiation, deal structure, deferred consideration or earn-outs.

However, those conversations are much easier when the seller enters the process with a clear understanding of how the market is likely to value the business.

The best time to have that conversation is usually well before the company is formally put up for sale.

For business owners considering an exit, an early and independent assessment of value can provide a realistic starting point, highlight areas that may improve value and reduce the risk of an unexpected valuation gap derailing a future transaction.

If you are considering selling your business — whether in the near future or several years from now — speaking to your accountant and corporate finance advisers early can help you understand what the business may realistically be worth and what can be done to maximise that value before approaching the market.

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