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5 Mistakes To Avoid While Selling Your Business Online | M&A Advice
One minor oversight in your valuation can wipe out millions in equity before you even reach the closing table. In this video, M&A Advisor Ryan Condie breaks down five advanced valuation mistakes and shows exactly how to defend your value during the due diligence phase. While many entrepreneurs assume business value is a simple math equation, sophisticated buyers look for technical “leaks” to drive down your price. This guide helps you audit your own business, from working capital disputes to intellectual property ownership, before a buyer does.
CHAPTERS
00:00 Introduction
00:12 5 Advanced Valuation Mistakes Sophisticated Buyers Use
00:52 Mistake #1: Relying on Generic Industry Multiples
01:33 Mistake #2: Failing to Account for Net Working Capital
02:06 Mistake #3: High Customer Concentration Risks
02:37 Mistake #4: SDE vs. EBITDA (Using the Wrong Profit Metric)
03:16 Mistake #5: The Intellectual Property (IP) Ownership Trap
03:48 How to Audit Your Business Before You Sell
TRANSCRIPT
00:00 Introduction
Most entrepreneurs assume their business value is a simple math equation, but one minor oversight in your valuation can wipe out millions in equity before you even reach the closing table.
00:12 5 Advanced Valuation Mistakes Sophisticated Buyers Use
Today we’re going beyond the basics to break down five advanced valuation mistakes that sophisticated buyers use to drive down your price while showing you how to defend your value. Quiet Light Advisors have navigated thousands of deals and we know exactly where the hidden value leaks are during the due diligence phase. Stick around because many founders rely on generic industry multiples they hear in headlines, but those averages are often a myth. Later in the video we will show you how to look past those guesses and use actual comparable data to set an asking price that buyers will actually respect. We will walk through the specific technical traps that catch even experienced founders from working capital disputes to ownership of your intellectual property. The central question is, are you selling a clean asset or a messy liability?
00:52 Mistake #1: Relying on Generic Industry Multiples
We’ve designed this guide to help you audit your own business before a buyer does. When you’re preparing to sell your business, the biggest risk often involves using the wrong data to set your expectations. Relying on broad industry multiples like saying every e-commerce brand sells for 3x earnings can get you into trouble fast. Broad averages ignore the nuances of your specific growth rate and niche. To set a real price, you must use actual comparable data from recent closed deals in your specific sub niche. Businesses that are growing 100% a year will get a much different valuation range than a business dropping 50% a year even if those two businesses have the same trailing 12-month numbers. Working with an advisor who has access to private databases of closed transactions will give you the confidence needed to sell your business.
01:33 Mistake #2: Failing to Account for Net Working Capital
One of the most common surprises that happens at the closing table has nothing to do with your sales and everything to do with your cash flow. The mistake is failing to account for networking capital. In businesses above four or five million, buyers expect the business to be delivered with enough cash and inventory to cover near-term obligations like bills and payroll. Imagine you agreed to a five-million-dollar sale price. During due diligence, the buyer realizes you have a hundred thousand dollars in unpaid vendor bills, payroll due tomorrow, and no inventory. They’ll subtract that amount from your sale price to ensure the business stays afloat from day one. Determining your peg or average working capital early in the process is critical so there are no surprises at the finish line.
02:06 Mistake #3: High Customer Concentration Risks
High revenue numbers can be deceiving if that income is not properly diversified. High customer concentration where one single client or source represents more than 20% of your revenue can give pause to a buyers. A quick example is I sold a service business making 2 million a year, but one client provided 500,000 of that revenue. If that client leaves, the business loses 25% of its revenue instantly, which would impact the profit numbers even more. A buyer will discount the entire valuation of your business because of that risk. Diversifying your revenue streams and customer density is critical to a higher exit.
02:37 Mistake #4: SDE vs EBITDA (Using the Wrong Profit Metric)
Using the wrong profit metric can result in a valuation that is off by hundreds of thousands, if not millions of dollars. The error sellers make is confusing sellers discretionary earnings or SDE with EBITDA. For businesses generating less than 1 million in profit, we typically see SDE, which includes the owner’s salary and benefits. For larger businesses, say 2 million or 2 and 1/2 million or above, we use EBITDA, which is more standard for institutional buyers. EBITDA businesses generally trade for higher multiples because they come with a management team in place. If a founder of a larger company uses the wrong multiplier on their profit, it can lead to overvaluing or even undervaluing the business and scaring off serious buyers. Using the metric that matches your business size and the type of buyer you are targeting will help ensure a smoother exit.
03:16 Mistake #5: The Intellectual Property (IP) Ownership Trap
If you cannot prove you own your business assets, they are essentially worthless to a buyer. The mistake is not having written work for hire agreements with contractors. If a developer or writer created your core product without a legal transfer of ownership, you technically do not own your intellectual property. If a software company goes into due diligence for an eight-figure exit and the buyer discovers the lead developer never signed an assignment of invention, the buyer now sees a massive legal risk and could slash the valuation by 30% to cover potential lawsuits. You need to conduct a legal audit and ensure every person who has touched your code or content has signed a legal assignment of ownership.
03:48 How to Audit Your Business Before You Sell
A professional valuation does more than give you a number. It gives you a road map to fix these leaks before you sell. If you want to know which of these traps might be hiding in your business, click the link in our description for a comprehensive valuation. You only get to sell your business once, so make sure you get the full value you deserve.
