Managing unsophisticated vendor expectations on valuations of smaller deals

by a searcher from University of Manitoba

2 years ago

Have noticed that many vendors of smaller businesses (say $300K-800K SDE) have overly inflated ideas about valuation multiples. Obviously it'll depend on the industry, etc but while the comps might suggest a 3x multiple of SDE, many sellers have it in their heads that they should achieve 5x or higher. Perhaps their friend/lawyer/financial planner told them, or they've seen other higher value deals go for these multiples, but they're often not making valid comparisons. Even certain business brokers (vs lower/mid-market M&A types who do higher value deals) will list these businesses at higher multiples, presumably to get the listing. While negotiation is always crucial, how can one level-set expectations early in the process without having the vendor take offense to what they may consider a low-ball offer?

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searcher from Cornell University

One tactic we have used is to refer the unrealistic seller to a broker that we have done a deal with in the past. The assumption is that even if this broker attempts to win the business that you would be in the prime position to win since i) you referred the seller and ii) that broker has had a good experience selling you a business.

2 years ago | like reply | 0 likes

searcher from Carnegie Mellon University - Tepper School of Business

Unless it has been on the market for a while such listings are waste of time. Usually, good brokers know the market range for a business and price it accordingly. They are strong enough to manage the expectations of the seller professionally. But often you will find a good business with unreasonable expectations because the broker earned his/her business by suggesting a much higher number than other brokers or the seller was adamant about a price and the broker was too desperate to decline that client.

2 years ago | like reply | 0 likes

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