:quality(80))
Subjectively Shaped Starting Points
This dilemma arises simply from the differing perspectives of the seller and the buyer. Particularly in the SME sector, owners expect to achieve the highest possible sale price for their “life’s work,” which is ultimately intended to serve as compensation for the many sacrifices and efforts involved in building and running their business. In contrast to this highly emotionally driven “return on passion,” buyers view their commitment more as an investment that is evaluated based on business-related opportunity and risk factors—naturally, for tactical negotiation reasons, with a greater emphasis on risks than on opportunities.
Objectivizing the Basis for Negotiation
A professionally conducted business valuation aims to—largely—exclude precisely these subjective factors and determine an objective enterprise value. In this process, not only quantitative aspects are taken into account, but also value-enhancing measures such as the industry’s level of digitalization, the future viability of the business model, sustainability, and ESG criteria are factored into the valuation.
And this already makes it clear that none of the various methods can determine the objective, sole valid value that also determines the purchase price. Rather, the methods most widely used in the market—the income approach and the discounted cash flow (DCF) method—focus on the company’s future earnings or cash flows. However, these methods are not based solely on income statement or balance sheet figures; rather, they also take into account qualitative factors such as ownership structure, market position, workforce composition, proprietary (machinery) infrastructure, etc., in the form of a capitalization rate. As a rule, the result of one of the above-mentioned methods is then validated using the so-called multiplier method, in which EBIT or EBITDA is multiplied by a factor typical for the industry, derived from actual sales figures.
Here, too, there is no single “true” value. On the one hand, this is because a minimum and a maximum value are always specified, and it is not clear which of a company’s factors account for the minimum value and which for the maximum value. On the other hand, there is no uniform standard for which EBIT figure to use—last year’s EBIT, that of the last 3 or 5 years, that of the next 3 or 5 years, or a weighted average of past and future values. Therefore, in my opinion, this method is suitable exclusively for verifying the plausibility of the values determined using the income approach or the DCF method.
Requirements for Sellers
Regardless of the valuation method chosen, business owners should not underestimate the effort required to prepare a business valuation. In practice, it often turns out that compiling the necessary documents—such as business plans—is very time-consuming, or that some of these documents do not even exist. Without professional support, such projects frequently fail as early as the preparatory phase.
Negotiations Determine the Outcome
Although a business valuation is largely based on clear data, it is important to note in the SME sector that not everything can be evaluated using irrefutable data and facts. Discretionary factors, particularly regarding planning assumptions or qualitative factors, also influence the value of the business. Therefore, a professionally conducted valuation should be viewed as a sound basis for negotiation. Naturally, a buyer tends to place greater weight on the company’s potential weaknesses or risks and to downplay opportunities or advantages in order to secure a lower purchase price. However, a reputable business valuation provides well-founded arguments specifically regarding these points—arguments that must first be refuted. In addition to these factual arguments, the business owner’s personal situation influences the outcome of the negotiations. For example, a quick sale necessitated by the owner’s age can weaken the seller’s negotiating position.
Conclusion and Recommendation
Many business sales still fail due to inflated asking prices, which are often heavily influenced by emotion. A professionally conducted business valuation not only offers the advantage of a solid basis for negotiation but can also help the owner—through the preparatory work and discussions during the valuation process—to arrive at a more realistic assessment of the company’s value.
con|cess M + A has been advising entrepreneurs in the DACH region for nearly 25 years. Several hundred business owners have been successfully advised and supported in preparing their business valuations and in the subsequent sale negotiations.
