“He says he can get $5 million for my company, but in the spirit of due diligence, I wanted a second opinion.” Bennett (not his real name) had asked me to meet him at Starbucks at the suggestion of a mutual friend who thought he might be rushing too fast to sell his company. Bennett told me he launched his company in 2012, “We started with a basic idea, got a few breaks along the way and made a little bit of money.” He took a slow drink from his coffee cup and continued “But I am tired, I never knew what a pain it’d be keeping up with cranky employees and slow-paying customers. You know it’s hard to ever really get ahead.”

“So I take it you’ve decided to sell?’ I asked, though I already knew how he’d answer. “Yep, I met with a business broker last week and when he told he could get me $5 million, I decided to go ahead.” I asked, “How did he reach his $5 million valuation?” to which Bennett replied, “Good question, I’m not really sure.”

Valuing a business is part science, part art. Unlike selling real estate that rely on logical comparables, a business valuation requires active knowledge of the market, experience in how buyers think, and a current understanding of deal financing. That’s why a lot of business brokers get it wrong. I didn’t know before I we met him at Starbucks that another business broker had given Bennett a $5 million expectation. So, imagine the awkwardness when I told Bennett the truth about his business valuation. As I reviewed his numbers, I told him he would probably see a total deal value around $2.5 million, and most likely would not see it all in cash at closing.

Of course, Bennett was uncomfortable with my feedback “Was the other guy wrong or are you just being too conservative?” he asked. As I walked Bennett through the mechanics of my valuation logic, he could quickly figure out that my advice was sound. I could also see that Bennett was figuring out how the other broker was working. “I couldn’t understand why he was telling me ‘we need to get to market fast’, but now it makes sense to me, he wanted me to commit to him on the spot.”

Business brokerage is broken. Anybody can call themselves a business broker, and when he/she meets an uninformed business owner, there’s no one around to push back on bad advice. Bennett’s situation was classic, the broker assumed Bennett was anxious to sell, so the broker gave him a wildly inflated valuation expectation just to get Bennett to list the business. I see this all the time; the broker does this expecting the owner to cave once an offer comes in. But the owner ends up spending time and energy toward getting a deal done that will never meet their expectation. Owners end up being the victim of what is essentially a bait-and-switch scheme. 

Bennett was resigned to the truth of my valuation forecast, “This hurts, but I can tell that you know what you’re talking about.” We talked for another 40 minutes about specific things he could do to increase the business value. Bennett might get to a $5 million valuation over the next 3 to 4 years. Whether he has the energy and want-to to get it done, I don’t know, but at least he’s dealing with honest and real information.

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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."

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