“Jim, I decided to go with another advisory firm. They say they can get more for my company than you think it’s worth.”

This recent comment from Tracy (not her real name) was the first time in fifteen years I have lost an engagement because the business owner was picking another intermediary. It seems the other broker convinced Tracy that he could get her a higher price for her company.

I had told her the business could be sold for $4 to $5 million. The other broker told Tracy he could sell the business for $8 million. How do you explain such a wide swing? Oftentimes, a business owner is lured to sell their business by an overly optimistic valuation. The overly optimistic valuation is usually the result of inexperience or a clumsy effort to land the engagement based on false hope. Sad though true, there are a lot of brokers who will hype the valuation in an effort to get an engagement.

Tracy was understandably excited to hear her business could be sold for $8 million. Even though the other broker had a higher fee than mine, the net to Tracy (assuming the business could be sold for $8 million) would be about $2.5 million higher. So, mathematically, I could hardly blame Tracy for her decision. The problem being, of course, the business will not sell for $8 million. The other broker gave her a pig-in-a-poke promise.

So how does a business owner avoid wasting time on a pig-in-a-poke promise? First, do not rely on the opinion of just one broker (a/k/a, intermediary, M&A consultant). Second, if you get opinions of value with a differential of 15% or more, ask your accountant to interview the brokers you are considering. Third, engage the input of your wealth planner (financial advisor). He or she might not know how businesses are valued, but they likely understand basic financial principles, and their instinctive opinion should be a valuable consideration in your decision.

I leave you with one simple premise: don’t select a broker just because you like his/her opinion of value. You might just end up with a pig-in-a-poke.

 

Tennessee Valley Group

Jim is an attorney (non-resident status with the Missouri Bar) and though he no longer practices law, he has read and negotiated enough legal documents to fill a cargo tanker. He has an MBA from Harvard Business School and knows how Wall Street and private equity operates. Jim is a Tennessee Supreme Court Rule 31 listed general civil mediator with tons of experience helping business owners (large and small) work through sensitive problems to achieve winning results. He is the author of "Home Run, A Pro's Guide to Selling Your Business, Seven Principles to Make Your Company Irresistible."