Advice on Unrealistic Seller Valuations
February 12, 2024
by a searcher from The University of Chicago - Booth School of Business in Nashville, TN, USA
I have a couple companies that I'm interested in but after getting their CIMs they are wildly overestimating their value and I’m wondering if anyone has had any success resetting expectations and still being able to reach a deal. They are both going through the same broker, but he is primarily a CRE broker rather than business broker. He admitted on a call that this wasn’t something he normally does but is helping out a couple people from his network. These businesses have unsurprisingly been on the market for almost two years now.
The valuation for their business was already on the higher end for what they do at 5x EBITDA but they then added the business assets as a separate line in the valuation, almost doubling the “value” of the company by double counting these assets.
I’m wondering if anyone in the community has had any luck resetting expectations with the Seller and how you did it respectfully. I was considering pulling together comps but I don’t want to waste their time and mine going through too much if they aren’t being serious.
Thanks!
from University of California, Davis in Reno, NV, USA
To be clear, I'm not endorsing this philosophy/attitude, it just happens a lot, and it is freqently abetted by Intermediaries that put overpriced listings on the market in hopes that the market will beat the stiff necked seller into submission.
If you can ever have a conversation with either of these sellers, or if you can coach the agent that is standing between you and the Sellers, you can try making the following points:
1) Model the cashflow with realistic financing rates and ask the seller/agent "Would you do this deal?". My bet is that you wouldn't have enough money to live on, let alone grow the business.
Better yet, if you have a relationship with an SBA lender, see if you can enlist thier help to make the point for you. Be respectful of their time, but they deal with these situations ALL. THE. TIME. and can give the perspective of a 3rd party that actually has an incentive to loan MORE money vs your incentive to pay less.
2) I try to address this early in the listing process with Sellers because everyone wants to be paid for the business + the assets (Inventory & FF&E), by stating some variation of, "The assets and inventory are what generates the cashflow that we are multiplying by "X" to arrive at a price; you can't remove those elements and expect the business to generate the future cashflows that a prospect buyer is purchasing."
Of course, it is entirely possible that the business keeps too much inventory on hand or has excess equipment for the amount of cashflow generated (it happens a lot when the seller has grown out of cashflow for many years and has not had to manage debt) and it's not crazy for the Seller to be compensated for those extra/unnecessary assets, but the buyer (especially an owner/operator that is buying thier own job) doesn't want/can't afford to purchase assets that don't immediately generate cashflow.
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
The best thing you can do is try to educate the broker and possibly even the seller directly if you get access. Unfortunately if you are one of the first buyers to the table and they have not heard that their business is over-valued multiple times, they may not listen to you. You can still make an offer, and hope over the next couple of months as other buyers continue to tell them they are asking too much, that they will eventually come back to you. But I would not waste to much time if they are not willing to be realistic.
Also, keep in mind there are many reasons individuals list businesses. Sometimes it is because they are looking to retire or they legitimately want to exit. Other times it is because they have friends that have gotten big paydays or a broker has told them they can get them a big payday, and they may only be wiling to sell if they get that ridiculous price they are looking for. If you can also find out why they are selling, that might help provide guidance on what they might ultimately be willing to do. Good luck!