How to Manage Unrealistic Valuation Expectations from Sellers


Prior to accepting an engagement, we have a very open and honest conversation regarding current market condition and value. We request three to four years of historical financials and current year projections, including owner add-backs to arrive at normalized adjusted EBITDA to . We then have a conversation with our clients regarding current market multiples for their business and some possible scenarios, such as contingent payments, earn-outs, management contracts, and bonuses that can be potentially add to the overall value of the business when they sell.


“We focus on the lower middle-market and work primarily with closely-held and family businesses. Therefore, when they decide to sell, it is typically the one and only time that they are going to go through the process.


“We approach potential valuation disconnects in several ways. First and foremost, we acknowledge the client’s expectations. Toward that end, we ask how they arrived at their number. Absent documented comps that apply to their businesses and an understanding of individual factors that can detract – or add – to them, it is not at all unusual for clients to make mistaken assumptions here. And rightsizing comes down to a sober explanation of the market as it exists and applies to them. It becomes trickier when the decision to sell is based largely on an unlikely outcome. Here, we often introduce a concept we call the ‘Goal Price Trap.’ Quite simply, we begin to lay out what would likely need to be done to increase the probability of achieving their goal price. Sometimes, clients are willing to invest time and resources to reach their targets. And for them, we support their decision to delay, and closely monitor their progress to be sure they remain on track. But if they are not, they readjust, rather than fall into the Goal Price Trap and bear the risk that business or sector factors may erode the value of their company over time.”


Unrealistic valuation expectations come about for all sorts of reasons: sellers want to maintain their current standards of living, or they heard about a friend who got a certain price for his company (often regardless of whether it was in the same industry or stage of growth). Lower middle market and middle market business owners are, more often than not, not M&A experts; they usually come to the table with deep industry expertise, but little practical experience when it comes to selling a business.