When to Ignore the Market Value for Your Company

“I call you for help selling my business, but you tell me I shouldn’t sell it now. What kind of business broker does that?”

Ricardo (not his real name) retained me to help him evaluate an unsolicited offer he had received from one of his top suppliers. During our first call, he said, “I am not looking to sell the company, we’re growing, I love what we’re doing for our customers, and the team I have around me is first class. But I’ve always heard these strategic buyers pay crazy prices, so when they came knocking, I thought I should hear them out.”

I assured Ricardo he was doing the right thing to evaluate the idea of selling, but our process would not be to just bargain for the highest price. I wanted to help Ricardo make the right decision, and that might be to not sell, even after receiving this eye-popping offer.

I get about one call a month from a business owner like Ricardo who needs help sorting through how to handle an unsolicited, but tempting offer. Most M&A consultants (business brokers, investment bankers, intermediaries, whatever you want to call them) get a call like this and immediately send over an engagement agreement hoping to land a nice big client. That’s not how I roll. I spend time with the business owner (at no cost to the business owner) to understand his/her objectives and understand the full context of their decision-making process. Rushing to sell your business, just because you get a tempting offer, can be a short-sighted financial decision.

Every business owner should understand the concept of net present value. Simply said, it is the value today of a business’ projected future cash flows, discounted each year by a rate of interest reflecting the owner’s cost of capital plus risk to be in that business. Now understand, you can go to the finest business schools in the world and spend years studying this concept.  Here’s how I boiled it down for Ricardo as he evaluated how to respond to the offer for his company. “Let’s evaluate the decision relative to a period of time in the future, say five years. We need to calculate which option makes you the most money: selling now and reinvesting the proceeds for that five-year period, or continuing the run the company then selling in five years?”

Now understand this, the net present value of your company is NOT the same as the market value of your company. Net present value describes what the company is worth to you, the owner. Market value describes what the company is worth to somebody else. It goes without saying, even if you get an offer that represents the full market value of your business, that doesn’t mean you have to sell it. However, if you get an offer that represents the net present value of your business, you should think long and hard about why you wouldn’t sell it.

When Ricardo and I did the math on his options, we calculated the net present value of keeping the business to be about 20% more than the value of the eye-popping offer. So what did we do? I met with the potential buyer and calmly explained our thinking. This was a much easier, less contentious process than the usual card-playing negotiation that is more like shadow-boxing than logic. Side note, let me assure you, logic always works with smart buyers.

After my conversation with the potential buyer, they came back with an offer about 10% higher than their original offer. It was indeed a very tempting number, but since even that revised offer was still not as high as the net present value of keeping the company and selling in five years, Ricardo decided to not sell.

If you are the owner of a growing business, you should never think about selling your company without first running a net present value calculation of keeping the company and selling it in five years. You might be surprised at what you learn. If/when that eye-popping offer comes in, you’ll have a much better sense of how to negotiate and when to say yes or, as importantly, when to say no.

 

JIM CUMBEE is President of Tennessee Valley Group, Inc. a retainer-based business brokerage and transition mediation firm in Franklin, TN. Cumbee is an attorney and has an MBA from Harvard Business School. He has a wide range of corporate and entrepreneurial experiences that make him one of the most sought-after business transition advisors in the state of Tennessee. The names and fact patterns above have been changed to preserve the parties’ identities.

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Tennessee Valley Group

Jim Cumbee established Tennessee Valley Group to help business owners fulfill their dreams for life after business ownership. It’s a mission that his 30+ year career history had prepared him well for—in addition to being an attorney, transition mediator and business broker, Jim has been a buyer, seller, and entrepreneur. His broad range of experience gives him unique insight into how business buyers and sellers can achieve their goals.

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