Often with a small to midsize company the owner has put a great deal of time and energy into the success of the business. The owners may see the company as an extension of themselves that they worked hard to build and as a result may be looking at it from an emotional or egotistical perspective. Some owners may know the ins and outs of the business like the back of their hand but may not take the time to evaluate how the business may look to a potential buyer. This lack of awareness and preparation can lead to potential reasons for termination of the sale including poor accounting and bookkeeping, inaccurate sales or performance data, unrealistic valuation, or longer than expected transition times to name a few.
According to a sample polling of IBBA business advisors the top reason that half of the deals fell through in Q1/2018 was unrealistic seller expectations at 12% (tied with buyer cold feet). When valuing the business prior to sale it is not surprising that many owners will have a higher than expected price in mind. This is reasonable knowing how much effort has been put into to getting the company where it is today. Owners will also have strong emotional ties with the business that simply are not quantifiable. This perspective can further be explained by what is called the endowment effect. Simply put the endowment effect is the tendency for people who own a good, or business in this case, to value it more than people who do not. The endowment effect causes many sellers to have an inflated idea of the sales price due to their unique perspective. Buyers on the other hand are looking more at the bottom line and are concerned with cash flow and potential risks. A buyer is usually concerned with specific questions such as: [Read more…]