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Putting a price on your business…and why we don’t let you name your ‘magic number’

At a recent Q&A event for entrepreneurs considering selling a business, one comment in particular made quite a stir. Former client, Alison Lessmann, told attendees: “BCMS won’t let you name your price to the buyers – that’s a golden rule. Whether it’s £5m, £50m or £500m, you are told in no uncertain terms to keep that information to yourself, and make the buyer decide what your business is worth to them.”

ALISON LESSMANAlison, who sold her airline foodservice business to the Emirates Group, told us that she had a number of business owners approach her personally after the event to find out more. Why does BCMS do this? How can it hurt to have a ballpark business valuation?

There are many strands to the answer. Firstly: price-chipping. It’s human nature to go for a bargain, and that’s the same in business sales as it is in any kind of deal-making, from property to fine art auctions to car boot sales. If you’ve set an aspirational asking price with your buyers – and it’s usually a round number – then one of three things will likely happen.

One: you’ll get a lowball offer, in the hope that money on the table will tempt you. Two: you’ll get a ‘one-time-only, take-it-or-leave-it’ offer. Three: you may get a buyer meeting your terms and offering a warm handshake immediately – and that’s a sure sign that you have hugely undervalued your business, and your magic number was miles off.

How BCMS value your businessBCMS puts the onus on the buyers to value your business. You have to let the market decide, because only then will you get an accurate assessment of the value of your company. Competition is crucial here, because potential buyers may value your company very differently. They will typically use mathematical calculations to arrive at on offer – a multiple of your past profits, say – but this will be quickly revised if other competing companies are in the frame too. Faced with rivals, the buyer who really wants your business will pay for the privilege of owning it.

I’ll give you an example from a deal that completed just last month. Following meetings with 13 different parties, our client had seven different buyers in the frame. The lowest first offer came in at £2.27m. Most of the other parties came in at around £5m (another round number). The eventual buyer entered negotiations at £4.2m, before revising to £5m, and eventually tabling £7.3m. That’s a £3.1m uplift, from the same buyer, for the same business, over the course of a few months!

And that’s why, as Alison rightly says, we won’t let our clients name their price. Business valuations are moving targets. Don’t pick a number: it could be the most expensive mistake you ever make.

 

 

 

 

Dave Rebbettes's picture
Posted Aug 2017
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