Key Takeaways on how to avoid disappointment when selling your business:
- a common mistake people make when evaluating their business (similar to evaluating their home)
- ways to avoid setting unrealistic expectations
- how to endowment effect impacts your ability to set reasonable pricing expectations
- 2 simple things you can start implementing immediately to grow the value of your business
A Story of Disappointment
I have a friend who we shall call “Ari” who lives in South Texas. Ari had been living in his house for 20 years and was looking to sell. Ari is not an experienced real estate person. In fact, the last deal he did was buying the house. Ari lived his life as a mechanic and knew everything about taking apart and putting together cars. The only thing he really knew about houses was there was a ton of paperwork and he had to make a mortgage payment every month.
He and I were at a barbecue a few months ago and I asked him his expectations on selling. He told me he’d talked to a Realtor and would be thrilled to walk away with a profit of $100,000.
During the course of the barbecue, Ari was talking to other friends about their thoughts on selling and how he should price. Based on their experiences, they told Ari that he should be looking at $150 – $200k profits on the sale. Now, most of these people were basing their price expectations on houses in their neighborhood. In addition, they hadn’t even seen his house. But by the end of the event, Ari was sure that he could sell his house and make $150-200k profit.
So What Happened?
Eventually, Ari was able to sell his house and he even made a $110k profit. Was he satisfied?
No. First, to get to a higher selling price, he ended up making much more expensive investments than he should have. Second, it took him 8 months longer to sell. When he went over the numbers, if he would’ve followed his Realtor’s advice and sold in the condition it was in, he could’ve saved that $10k in upgrades and 6 months of holding costs & frustrations.
How Do You Avoid Disappointment When Selling Your Business?
Many business owners are like Ari. They understand and are experts in their field, but that doesn’t mean they understand the first thing about selling a business. Here are x ways to better prepare yourself for a transaction so you can avoid disappointment when selling your business:
In the case of Ari, he originally asked an expert to perform a market analysis on his business and came up with an expectation. However, he then talked to others who weren’t experts and gave him a different set of expectations. This new set of expectations based on improper valuation set Ari up for disappointment.
As in the case of real estate, the price of someone’s house in a different zip code has no bearing whatsoever on the price of your house. Understanding the proper ways to value your business will allow you to set realistic expectations and avoid disappointment when selling your business.
Looking to get a proper valuation on your business? Want to see areas where you can improve to increase the value of your company? Click below to get your business valuation score for FREE!
Would Someone Want To By This Business?
Once you’ve gone thru and evaluated the business, the next thing to ask your self is whether or not this is an attractive business to buy. This step is a difficult one to take because it involves you looking at your business thru the eyes of someone other than yourself.
Think back to a common mistake most people make when they sell a house. They tend to overvalue their house because it’s their home. This phenomenon is known as the “endowment effect” which means that we value something we own 2x more than others will value the same item.
The Endowment Effect in Action
When the seller looks at their kitchen, they automatically think of all the family dinners and birthday cakes that were enjoyed in this room. However, when a homebuyer looks at a kitchen, all they see the 10×12 space and think about whether or not they can fit their existing dining room table into it.
The endowment effect happens to business owners as well. They value their business much higher than an outsider who simply looks at the numbers. The reason, again, is that the business owner doesn’t just see the numbers; they see the sacrifices that went into getting those numbers. Instead of looking at the bottom line, they think of the school plays missed, time away from family, and the years worth of stress and anguish that went into establishing those revenue streams.
The endowment effect and the owners’ inability to properly see their business thru the eyes of their buyers are typically the biggest mistakes they make when selling. It also leads to high disappointment when they see an offer.
2 Steps To Take To Reduce The Endowment Effect
Ask yourself the following questions:
- How involved am I in the day to day operations of the business? If someone offered to sell you a new widget, but there were no instructions on how to use the widget and the only person who knows how to run it will disappear as soon as you purchase it, would you buy it? Probably not. In this scenario, the business owner has a business that is reliant on the expertise and experience of the owner. Then, once you buy it, the owner goes away and you have to figure out how to run the business profitably. If you don’t have systems and processes in place for every aspect of your business, then start working on that now or be prepared to sell at a major discount!
- How dependent is the business on a star employee, customer, or vendor? Suppose you have a client that provides you with 75% of your revenue. You’ve known this client for 20 years, been to each others’ houses for holidays and picnics. He’s even the Godfather of one of your children. As long as you’re the owner of the business, then this business relationship probably makes you feel good. However, if you’re looking to buy this business. then you’ll be terrified of this one client deciding not to work with you. Again, if you have most of your eggs in one basket, whether it’s a customer, employee or vendor, then your company is not going to be valued very well. Diversification is key to raising the value of your business.
Once you understand these two factors, you can then determine what steps are needed to make your business less reliant on you as the owner and more attractive to potential buyers.
Do you really want to sell? An amazing 75% of business owners regret selling their business within 1 year of the transaction. Why? Because they weren’t ready to sell yet. Take the brief survey below to see if you’re going to avoid disappointment when selling your business.
Summary of 2 Ways To Avoid Disappointment When Selling Your Business
In the story of Ari selling his business, Ari was disappointed because his expectations were unreasonably higher than they should’ve been. Ari also made poor investment decisions to try to increase the value of his house and didn’t get near the return he was hoping for.
To avoid disappointment when selling your business, it’s important that you value your company properly. The biggest hurdle that most small business owners have to overcome to get the best price is to make the business less reliant on them and to diversify their reliance on a specific employee, vendor, or customer. Once you overcome these two obstacles. you’re on the path to making your business more desirable to buyers and getting the payout you so richly deserve.