If you are a business owner thinking about selling your company, you may find that your idea of what your business is worth doesn’t quite match with what buyers are willing to pay for it. This difference is known as the valuation gap, and it’s more common than you might think.
Owners often dream big, valuing their business based on years of hard work, long-standing client relationships, and future growth potential. Buyers, on the other hand, are typically focused on what the business is worth right now in terms of its cashflow, the risks involved, and scalability.
But here’s the good news: a valuation gap doesn’t mean your exit plans are doomed. With the right mindset and strategy, it’s possible to navigate this difference and achieve a deal that benefits both sides. Here’s how to do it.
Step 1: Understand What’s Causing the Valuation Gap
Before jumping into negotiations or lowering your expectations, it’s crucial to understand why there’s a valuation gap in the first place.
Analyze the Valuation Report
Start by reviewing the business valuation thoroughly. What methods were used? Were earnings, assets, or market comparables the basis? Understanding the assumptions behind the valuation will help you identify any areas of disagreement or overlooked strengths in your business.
Identify the Source of the Discrepancy
Sometimes the gap comes down to differing visions. You might be projecting future growth in a new service line or geographic expansion, while the buyer is focused on your current profit margins. Emotional attachment can also cloud objectivity; after all, you’ve poured your heart into your business. Buyers don’t see your late nights and personal sacrifices. Often, they’re seeing the numbers and risks.
Step 2: Strategies for Sellers to Bridge the Gap
Below are some strategies to help bring your valuation closer to your asking price or at least make the deal more attractive to potential buyers.
1. Increase Business Value (If Time Allows)
If selling isn’t urgent, take the time to improve key value drivers:
- Diversify revenue streams: Introduce a new service or target additional customer groups to minimize dependence on a singular demographic. This Ultimate Guide to Getting More Clients is a great place to get started.
- Boost profitability: Streamline operations, trim unnecessary expenses, and focus on high-margin projects. Check out our tips for driving profitability for more information.
- Build a strong team: A business that doesn’t rely entirely on the owner is far more appealing to buyers.
- Strengthen your brand: Solid online reviews, a polished website, and a recognizable name in your market all add value. Our post on Proven Marketing Strategies can help.
2. Adjust Your Expectations
It’s tough, but sometimes adjusting your expectations is necessary. An inflated asking price can turn off qualified buyers before they even make an offer. Studies show that when a business is priced more than 15% above its market value, chances of a successful deal are significantly decreased. Aligning your expectations with market realities can lead to more serious interest and better negotiation outcomes.
3. Run a Competitive Merger and Acquisition Process
Attracting multiple buyers can create a sense of urgency and drive better offers, and a Merger and Acquisition Process, or M&A Process, can provide exactly that by formally marketing the business to multiple potential buyers (or investors), sometimes with the help of a broker or M&A advisor. A competitive process also gives you more leverage in negotiations, potentially further closing the gap.
4. Explore Creative Deal Structures
Not every sale is paid for in full up front. There are flexible arrangements that can help both parties meet halfway, such as:
- Earnouts: A portion of the price is tied to future performance. If the business hits specific goals, you get the rest.
- Seller financing: You finance part of the purchase, showing confidence in your business and lowering the buyer’s upfront burden.
- Rollover equity: Retain a small stake in the business post-sale to benefit from future growth.
- IP value: If you’ve developed proprietary systems, software, or methodologies, highlight and monetize them.
5. Communicate Openly and Transparently
Buyers are more likely to work with sellers they trust. Be clear about your business’s strengths and honest about its challenges. A transparent dialogue builds credibility and sets the stage for a collaborative negotiation.
Final Thoughts: Bridging the Gap with Strategy and Trust
In the worlds of remodeling, wood flooring, landscaping and other service businesses, value is more than what’s on paper; it’s also built on relationships, reputation, and results. Still, when it comes to selling your business, numbers matter. That’s why understanding and navigating the valuation gap is so critical.
Here are some key takeaways:
- A valuation is a starting point, not the finish line.
- Flexibility, creativity, and open communication can bridge even a wide valuation gap.
- Professional guidance, whether it be from an M&A advisor, business consultant, or some other source, can be invaluable.
Selling your business is one of the biggest decisions you’ll make, and it’s no easy feat. In fact, according to Worldwide Business Brokers, just under 20% of businesses with a revenue of $1 million or less actually sell. Knowing your worth and understanding how potential buyers see it can make all the difference in closing a successful deal.
Need help navigating your exit strategy or valuation? Let’s talk.
A well-prepared plan today can mean a more profitable transition tomorrow, and our team is ready to help with our Value Builder certification, partnership with IAG M&A Advisors, and a host of relevant services. Check out one of our biggest success stories, which helped one client get a selling price 3x over the original valuation.
