02 Dec Getting on the Same Page: How Perspectives Vary Between Business Sellers and Buyers
Buyers and sellers’ viewpoints may diverge on what a business is worth. Different priorities, emotions, and approaches to valuation can create a gap between what sellers believe their business is worth and what buyers are willing to pay. When both parties have a clear picture of the business’s financial health and potential, they are more likely to arrive at a mutually agreeable valuation.
Emotional Attachment vs. Objective Evaluation
For many sellers, their business often represents years of hard work, personal sacrifices and accomplishments. Understandable, this emotional attachment can lead them to consider their business as more than just a financial asset. In contrast, buyers often approach a valuation more analytically, looking at it through the lens of tangible financial metrics. For them, it is an investment, and they expect it to generate a return.
Sellers may highlight new markets, complimentary products or services, and otherer unrealized opportunities to justify a higher price. In contract, most buyers rely on proven cash flow rather than the possibility of future, speculative success. To take potential growth opportunities into consideration, it will need to be backed by solid evidence. Different Perceptions of Risk
Sellers often believe in the stability and sustainability of their business because they successfully managed their operation through various challenges, whether the Great Recession or the global pandemic. While they may downplay certain risk factors, buyers tend to be more sensitive to these potential considerations. Unique Qualities vs. Market Comparisons
Sellers often place a premium on their business’s reputation, location, or brand, perceiving it as unique and incomparable. In contrast, buyers typically rely on market comparisons and industry standards to determine fair value. While this approach is both common and valid, it’s crucial for buyers to base their assessments on a verified pool of actual sales data compiled from reliable sources, rather than anecdotal insights from friends or colleagues. Without a clear and defensible rationale for a premium price, buyers are inclined to pay only what similar businesses have recently sold for. Goodwill and Intangibles
Sellers frequently place a high value on customer loyalty, brand reputation, and other difficult to quantify goodwill. Skeptical of intangible assets, Buyers tend to look for tangible evidence of these more intangible considerations, such as recurring revenue, formal agreements, strong lead generation, or sales that outperforms the local competition. Considering blue sky is appropriate when it measurably adds value to the business beyond its tangible assets and financial performance.
Bridging the Gap
Understanding these differences is crucial for successful negotiation. The key is transparency, open communication, and proper documentation of the business’s performance and value drivers. When both parties have a clear picture of the business’s financial health and potential, they are more likely to arrive at a mutually agreeable valuation.
Sam Goldenberg & Associates helps buyers and sellers align their perspectives, bringing objectivity and expertise to the valuation process. We help both parties see beyond their own biases by providing market data, realistic valuations, and highlight hidden strengths or potential risks that each side may overlook. We ensure that both buyers and sellers are working with a shared understanding, facilitating smoother negotiations and increasing the likelihood of a successful transaction.
