Assessing the value of a business is often a combination of financial calculations and personal judgment based on the evaluator experience of similar transactions and a variety of adjustments to reflect differences in business models, environment, regulations, markets etc.

A small business is only worth what somebody is willing to pay for it. That introduces the notion of the value to the buyer as opposed to the intrinsic value of the business. Potential buyers who can see some synergies with the business will probably pay more for the business. Examples of synergies include cost reduction due to increased economies of scale, access to distribution channels enabling cross selling, access to new technologies, access to valuable brands etc.

Unfortunately the assessment of the synergistic value has always been extremely uncertain. Various acquisitions turned into financial disasters simply because most of the expected synergies never materialized. Research have shown that in large corporations, most of the enthusiasm for large acquisitions is mostly driven by executives seeking more power.   The larger the corporation, the larger the power of executives and their pay.

In the small business arena, most valuations are based on the companies history of profits not on the possible synergies. This is mostly because small business buyers are conscious of the high uncertainty in the small business environment. Why would somebody pay for the potential the the business might have. Small business buyers buy a business because of its potential but they only pay for its past results.

However, this doesn’t mean that a business with a bright history but a bleak future will still sell based on its history. The future is still the principal element buyers use in their decision to purchase a company.

Valuing a business before deciding to sell it is certainly a good decision. However, a business seller should understand the various limitations of business valuation and should remain flexible to the market reaction to his listing.

• Uncertainty about the asking price: small and medium size businesses do not command high price multiples. The selling price should not be the main motivation for selling a company. I frequently see frustration in seller’s faces when I tell them about what asking price they might ask for their business. Sellers say ” if I have to sell my business at this price then I would be better-off waiting another 2 years and earn this money in my business without having to sell it”. My answer is then “yes, wait 2 years and come to see me when you are ready to sell”. The business is worth more to its owner that it is to most potential buyers. Owners sell their businesses for other reasons than money. Reasons include need for change, retirement, new opportunities, sickness, moving, and many other reasons not related to money. However, for larger businesses ($1M and more in value) a deal structured as a share sale involves a tax advantage that makes the sale worthwhile financially.
• Uncertainty about Timing the sale: Most sales of small and middle market companies are driven by personal considerations that in most cases could be delayed. For example a seller contemplating retirement at the age of 60 could wait few more years before effectively retiring. This creates a huge indecision for business sellers. Timing the sale of a small or medium size business is mostly dictated by personal consideration rather economic cycles.
• Uncertainty about how to go about selling: this can be so overwhelming that the business owner keeps procrastinating for a long period before taking the necessary actions. For most sellers, this is a one lifetime event. As a result, sellers lack the  knowledge and experience to go through a smooth sale process. Some sellers discuss the issue with friends and relatives who are not qualified to advise them about it.  Other sellers would seek advice from their accountants or even entrust them with the sale of the business. Accountants however are qualified to do accounting but not to sell businesses. They are capable of analyzing the company financial statements but they are not qualified in marketing the business. Marketing a company for sale is a full time profession called business brokerage and requires a long experience and a variety of other skills including finance, sales, psychology, business strategy, marketing and others.

In my experience, business owners who know why they are selling and have a clear idea about what they will be doing after the sale and who seek help from professional brokers specialised in selling businesses are more successful in selling their companies.