In my last note, I wrote about how buyer activity can look more meaningful than it really is. Valuation has a similar problem.
There is a lot of talk about multiples in the market right now, but little of it is connected to value. Instead, references to multiples are being used to win the engagement.
We are seeing more advisors throw out valuation ranges that are designed to get an owner’s attention and, in some cases, high enough to get them into the market. We have seen owners approached with claims that their business is worth substantially more than it is, and in one case, we heard a national firm advertising 8x to 15x multiples. That kind of pitch is effective because it tells owners what they want to hear. It also gets listings.
However, oftentimes the multiples quoted upfront are misleading. Once the process starts and buyers really get into the company, that number starts to look less certain.
From there, the seller either gets conditioned to accept less, or the advisor hopes someone shows up to salvage the process. Unrealistic expectations is a key reason why only 20% of listed businesses actually sell.
Strong valuations are still out there. But they are being earned by strong businesses, not handed out broadly.
Buyers are paying for quality, but they are paying a lot more attention to management gaps, customer concentration, transferability, margin pressure, and operational issues than the multiple talk in the market would suggest. These are the concerns that deserve more emphasis.
The transition and transaction readiness work we do with our clients addresses these items well before a buyer has the opportunity to uncover them. That is why we do not quote multiples in our discussions with sellers before we have done the work.
We would rather understand the business, pressure test the story and agree on a valuation range with the client before taking it to market. We think that is a more honest approach than leading with an exciting number before the business has really been understood.
None of this means owners should think smaller about value. It means they should think more carefully about how value is being presented to them.
