Don’t Get Fooled by Inflated Business Prices

Business sellers are being sold the “emperor’s new clothes”. If you don’t know the tale, a vain emperor who is obsessed with fancy new clothes is sold a magnificent garment that supposedly can’t be seen by stupid people.

All of the emperor’s court plays along because, of course, they don’t want to be seen as “stupid”. Until a young boy yells out the truth, “The emperor has no clothes!” By then, the con men tailors are gone.

The Allure of Inflated Multiples

Three different times this week, I heard this from a business owner: “We heard a lot higher price from so-and-so. They said they could definitely sell the business for a 7x multiple.”

In one case, the median multiple was 4x. We felt we could secure a 5x multiple, which the comps indicated was only achievable by the top 10%-20% of companies. The company was growing, had a good team, and had been around a long time. To put this in perspective, a 7x multiple is 75% higher than the median multiple. The other “advisor” had shared no data to justify such a premium price.

How to Avoid Being Sold “The Business Owner’s New Clothes”

Thinking about moving on? Before you exit:

1. Demand Data That Supports the Price Conclusion

This means similar industry AND similar size. Don’t compare your $4 million revenue company to a $20 million revenue company sale.

2. Research

How many businesses like yours have they sold at this multiple?

3. Reality-Check the Financing

Could a buyer realistically finance the deal at that price?

4. Clarify What’s Included in the Price

Many transactions are cash-free/debt-free. Some include working capital, and some don’t.

5. Use the “Would You Buy It?” Test

For a 7x multiple, it takes seven years to just break even, assuming the business continues at its current profit level. Actually, longer once you include the cost of capital and taxes. Would you buy it at that price?

6. Scrutinize Assumptions

What projections or performance expectations are built into the valuation?

Yes, You Can Get Above-Average Multiples

You can absolutely get an above-average multiple for your business. We have sold businesses for 7x multiples and higher.

But beware the M&A advisor, business broker, or even the occasional buyer who writes an offer that’s too good to be true, who tells you what an incredible price you are going to get and how AMAZING you’ll look in your new clothes.

Do your homework and ask the tough questions. Talk to one of our business brokers for a complimentary value range.