Guide to Selling Your Business, Part 2: Valuation and Control

By Dennis Michaels

In part one of this series, I described the inherent difficulties and pitfalls owners must face when preparing to sell their business — and why it’s important to start doing so years in advance. Today, I’ll explore some of the more complex but crucial elements of this issue: Business valuation, and issues of control.

The Art of Valuation

What is my business worth? That’s the first question on most sellers’ minds, and the answer is more complicated than you might expect.

There’s an old rule of thumb that says most businesses are worth about five times their earnings to most buyers, but that’s barely a starting point. Valuation is an art, not a science. Ultimately, the right price is the one a willing buyer and a willing seller are able to agree upon based on the facts and circumstances at the time.

Market trends, competition, specific buyer considerations and general economic conditions can wildly affect the valuation of a business. A strategic buyer may value a business in completely different ways than a purely financial buyer.

An owner of a successful business may focus on a history of stable profitability or a pattern of sustained growth and reach his or her own conclusions about the intrinsic value of the business. It is essential, however, to reality check these internal expectations against the market — however painful or difficult that may be.

A company that spent $10 million developing a successful product may be surprised to find that a buyer is only willing to pay $5 million based on an unbiased view of its commercial potential. The reverse may also be true: A buyer may not be able to build a product as cheaply as the seller already has. These are all factors that must be properly considered and understood to ensure you’re not leaving money on the table.

Understanding the impact of these factors and having time to adapt or react to them allows a seller to maximize the value of the business in the sale. In addition, if a seller engages a broker, investment banker or other financial advisor to assist with the potential sale of the business, that process should be started as early as possible. Feedback may reveal unfavorable trends or issues that can be addressed in the near term before the formal sale process is started.

Control Issues

Too often, sellers neglect looking at ownership and control issues when contemplating a sale. Some shareholders or a class of shareholders may have the ability to block a deal; if so, that’s information that needs to be processed at the sale’s earliest stages. At a minimum, it can be embarrassing, time consuming, and ultimately push the risk back on to the seller(s).

Reviewing the capital structure of the business, whether there are any contractual arrangements among the owners (e.g., buy-sell agreements, drag along rights, etc.) and understanding at a fundamental level who among the owners must approve any sale transaction is critical to ensuring the approval of the deal and the success of a sale.

Personality conflicts or specific investor goals can leave a business owner frustrated and caught between negotiating with both his co-owners and the buyer — a position offering very little control. Taking control factors into consideration early in the process can mean the difference between getting a deal done and not.

In the next entry in this series, I’ll look into the concepts of key employees and relationships and how they may affect a potential business sale.

Check out Dennis Michaels’ Guide to Raising Cash here. Plus, read the rest of the “Guide to Selling Your Business” series at the links below:

Dennis Michaels is an experienced business lawyer focused mainly on start-ups, angel and venture capital financings, mergers & acquisitions, and corporate law. Dennis advises entrepreneurs, investors and companies about business issues throughout the corporate life cycle from formation through finance to exit. You can e-mail Dennis at
Originally published: Jan 23, 2011

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