INTRODUCTION
I have been an Accountant for a long time and I have seen many business negotiations. I have seen people prepare good spreadsheets and make nice projections. They also make sure all the legal papers are in order.

 

But the truth is, the biggest problem in selling a business is not about numbers it is about how people think. When a seller and a buyer talk about a business they look at the financial papers but they have very different ideas about what the business is worth.

 

The seller thinks the business is very valuable like a diamond.

The buyer looks at the business but they see the flaws, even the ones that are not easy to see at first.

 

So figuring out the value of a business is not about doing math and using formulas. It is also about understanding how people think and feel.

 

THE CORE CONFLICT: WHAT IS "VALUE"?
In accounting, we talk about something called Fair Market Value. This means the price a buyer and seller agree on when both are willing to make a deal. They both know all the important facts.

 

People do not always logically make decisions.

 

Studies show that many business deals fail because buyers pay much money because they are too optimistic. This makes:

 

Buyers careful about sellers are very attached to their ideas about the business

 

This creates a big difference between what the buyer and seller think the business is worth and we call this the "Value Gap."

 

INSIDE THE MIND OF THE SELLER: THE "SWEAT EQUITY" PREMIUM

 

1. THE ENDOWMENT EFFECT

- Sellers think their business is worth more just because they own it.
- They are not just selling a business they are selling all the work and time they put into it.

- They want to be paid for all their effort. Buyers only care about what they will get in the future

 

2. THE "HOCKEY STICK" PROJECTIONS

- Sellers are often too optimistic about how their business will do.

They think the business will grow quickly but this might not be realistic.

 

3. IGNORING KEY PERSON RISK
- The person who started the business often does everything themselves.

-This might seem efficient to the seller. It looks like a risk to the buyer.

 

INSIDE THE MIND OF THE BUYER: SCEPTICISM AND ROI

Buyers think differently they are more careful and want to make sure they do not take too much risk.

 

1. INFORMATION ASYMMETRY
-Buyers think the seller might be hiding some information

 

2. DUE DILIGENCE MINDSET
- Sellers show all the things about the business

- Buyers look for all the things so they can negotiate a better price

 

3. COST OF CAPITAL
- Buyers compare the business to investments they could make

- They want to know how quickly they will get their money back

 

4. STRATEGIC VS STANDALONE VALUE
- Buyers might be able to make the business more valuable by combining it with their business

- But they do not want to pay the seller for the value they will create themselves

 

THE TUG-OF-WAR: VALUATION METHODS
Both the buyer and the seller use the same tools to figure out the value of the business but they use different numbers.

 

DISCOUNTED CASH FLOW (DCF)

- The seller thinks the business will grow quickly and is not very risky

 

- The buyer thinks the business will grow slowly and is riskier

 

MARKET MULTIPLES
- The seller uses the number in the industry to make the business look more valuable

 

- The buyer uses a number to be more careful

 

THE BATTLEFIELD: NORMALISING EBITDA
This is where the buyer and the seller have the disagreements.

 

SELLER’S ADD-BACKS

- The seller wants to add back some expenses to make the business look more profitable

 

- For example they might say "I paid myself much money so add that back to the profits."

 

BUYER’S DEDUCTIONS
- The buyer wants to subtract some expenses to make the business look less profitable

 

- For example they might say "Your systems are old so I need to subtract some money to replace them."

 

BRIDGING THE DIVIDE: MAKING THE DEAL HAPPEN
To make the deal work the buyer and the seller need to find a way to agree on the price.

 

1. EARN-OUTS

- Part of the payment is based on how the business does in the future

 

- This makes the seller happy because they get paid more if the business does well

 

2. SELLER FINANCING

 

- The seller lends some of the money to the buyer

 

- This makes the buyer happy because they know the seller is confident in the business

 

3. STAGGERED BUYOUTS
- The buyer buys most of the business at first. The seller still owns a little bit

 

- The seller stays involved in the business for a while to make sure it keeps running

 

CONCLUSION: EMPATHY MEETS ECONOMICS

 

To make a business deal work you need to understand both the numbers and how people think and feel.
- The seller needs to be realistic about what their businesss worth

- The buyer needs to understand that they are buying more than a business they are buying a legacy

- If either side is too rigid the deal might not happen.

 

In the end the price of the business is not a number it is the point where both the buyer and the seller are happy, with the deal.