The Perpetual Valuation Gap

​After years of working in M&A and countless conversations with entrepreneurs exploring their exit options, you start to notice patterns.

Recently, I ran into a situation that is common enough to be given a "name" - I call it "The Perpetual Valuation Gap".

That's when, after extensive discussions with a potential sell-side client and a detailed review/analysis of their business, you conclude the business is worth "X".  In this case, let's say $10 million. But the owner thinks it's worth $20 million.  So you part ways amicably and promise to keep in touch.  After all, if you can't come to some level of consensus on value, then running a professional, competitive sell-side process on behalf of a client will be a huge waste of everyone's time (and money).  Of course, there is always an outside chance for an "above market" deal, and no one can consistently predict the outcome of a sell-side engagement.  However, with years of experience, we certainly can judge the probability of a successful outcome.

So after a few years, you reconnect with the owner and conclude it is finally worth the $20 million they thought it was worth years before, but now the owner's valuation expectations are $30 million. Sometimes this pattern keeps going and the business never sells and they never engage, because you won't tell them what they want to hear. In some cases, the owner continues to field inbound inquiries from buyers, but the discussions rarely proceed very far.
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On occasion, they find an M&A Advisor that runs a full sell-side process that usually ends in disappointment.

In my humble opinion, the last thing you ever want to do is to put the business out there to test the market and end up in a failed process.  Unless the circumstances are easily explainable on why the business failed to sell, or there is sufficient time between the failed process and any new marketing initiatives, it is likely to be considered "poisoned" by some buyers that would otherwise be serious contenders.

The adage that "if at first you don't succeed, try, try again" does not apply to the Sell-Side M&A process!

Every seller wants potential buyers to understand the future potential of the business, and every M&A Advisor representing them needs to be able to paint a clear picture of the value proposition with potential buyers to drive the competitive process.

The best outcomes are when there is consensus on potential value, the business is properly prepared for a sale, it is marketed professionally, and when there are properly structured incentives in place to create alignment between sell-side advisor and client.

Eric Bosveld, B&A Corporate Advisors

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