A Seller’s Regret

Valuing any business truly is an art and not an exact science.  It is quite possible for 2 people to come up with a valuation for a business that varies by 30% or more and they could both be right. How could that be?????  The answer to that question leads us to the following real life scenario that our office experienced.

The seller of the company is a relative of the founder who had recently passed away.  This relative had limited knowledge about the business so he did what he thought was the prudent thing to do and relied upon a valuation provided by a certified firm introduced to the family by their CPA.  Sounds ok so far, right?  This is where it gets a bit tricky.

The valuation was done after the founder had died and it was provided for estate purposes.  The purpose for which a valuation is being obtained is essential to any situation and significantly influences the dollar range provided on that valuation.  A valuation for the purpose of selling a business on the open market is completely different than a valuation done for estate purposes….or a divorce proceeding….or an IRS audit….or a partnership dispute….etc.  Now we get to the “seller’s regret” and our real world experience.  A buyer made a terrific offer for the business, however, the offer was for 20% less than what the estate driven valuation had indicated.  The relative thought it was an insufficient price to accept for the company so he rejected it.  However, based on what the business is worth to a buyer who is seeking a reasonable return on their investment, it was an outstanding offer!  It was 20% more than a market-based value would have represented.  Unfortunately, the seller dug in his heels and would not budge on price despite our offices’ pleas for him to do the deal.  A few months later, when no other buyers emerged with an offer even close to the one previously rejected, he expressed his sincere regret that he did not heed our advice and accept that original offer.

The moral of the story is that education is the key to this business.  Call us to get educated on valuation, acquisitions, sales, the buying and selling process in general or just to say hello and talk business.  It’s what we love to do.