How-To Guide: Leveraging Variation in Valuation
In an ideal world, the valuation of a company would be an indisputable, verifiable fact—a numerical figure that all buyers and sellers agree upon wholeheartedly. Unfortunately, this is far from reality, and we would like to take a moment to highlight how subjective valuations can be. We hope this will bring a sense of confidence to all business owners who are either unsure of or disappointed in a number they were once told. With this knowledge, you will be much more prepared to fight for your company in a bidding war and end victorious with the highest possible offer.
Don’t get us wrong, all parties try to arrive at an evidence-backed valuation that seems reasonable. However, even with the aid of quantitative business metrics intended to remove bias, one party may value a particular business metric more or less than another party. Thus, even the most unbiased, metrics-driven investor will be influenced by perception and personal judgment when determining valuation.
Fortunately, the subjectivity and variation in valuation can be used to further the interest of business owners. If valuation is based largely on perception, then that perception can be molded in favor of the owner. To enhance your company’s valuation, there are a few initiatives you can take:
1. Curate a Diverse and Extensive Buyer’s List
If you include a greater number of qualified buyers in a transaction, you immediately increase the chances of finding one who places a higher subjective value on your company than others. This higher likelihood doesn’t mean you should market the deal to hundreds of buyers though. Just remain flexible when considering buyer backgrounds and transaction structures to improve your chances of identifying the ideal buyer. When creating a buyer’s list, it is wise to look beyond the buyers who approach you directly. These outbound buyers may not always have the genuine interest or qualifications needed to close a deal. Often, though not always, these buyers are value-driven and aim to bypass a competitive process to purchase your company at a reduced price.
2. Intensify the Competition
In a competitive environment, buyers are compelled to present their strongest proposals--both in valuation and in terms--to secure the deal. Simply involving more buyers naturally increases the competitive tension. When multiple buyers present offers, you are in a strong position to negotiate an improved valuation.
3. Understand the Investor’s Lens
A private equity firm may focus on EBITDA growth and operational efficiencies, while a strategic buyer might place higher value on synergies or market share. By understanding the motivations and criteria of potential buyers, sellers can tailor their pitch to highlight the aspects of the business that align with those priorities. For instance, if a buyer values recurring revenue, emphasizing your robust subscription model could significantly enhance perceived valuation.
4. Frame Your Business Story Strategically
Numbers alone don’t sell businesses; narratives do. Crafting a compelling story about your company’s potential can shape how investors perceive its value. Highlight the untapped opportunities your business offers, such as expanding into new markets, introducing innovative products, or leveraging proprietary technology. By framing your business as a growth engine, you can influence investors to see value that might not be immediately apparent from your financial statements. To get a high bid, it is key that buyers see not only the current value of your company, but also its potential for the future.
5. Hire a Trusted Advisor—like PEAK!
Going to market or finalizing a transaction is an undoubtedly intense process. Uncertainty, pressure, and anxiety during critical decision-making moments are bound to interfere with rational thinking. These emotions are understandable--considering the value of your business, built with your blood, sweat and tears--is on the line. You have worked hard and deserve to be fairly compensated with a valuation that accurately reflects the true worth of your business. The importance of the transaction is why many sellers prefer to let professionals handle the process on their behalf. As buyers are seasoned professionals that will stack the deck against you if left unchecked, you need a professional firm, like PEAK, who can advocate on your behalf and level the playing field.
Since valuation is not fixed, taking strategic actions such as curating a diverse pool of buyers, driving competitive tension, aligning your narrative with buyer priorities, and hiring an expert advisor to execute the process for you will have a profound impact on the financial outcome you achieve and the legacy you leave behind.