The Two-Year Dilemma for Business Sellers: Chasing The Dream Price or Increasing Earnings

Selling your business is one of the biggest financial decisions you’ll ever make, and the two years before a sale determine how much money you actually walk away with. Owners often find themselves stuck between two competing goals: chasing the dream price they believe the business deserves or pushing earnings higher before going to market. This tension is so common it has a name: the two-year dilemma. But with the right strategy, you don’t have to choose.

1. Earnings vs. Valuation vs. Sale Price: Understanding the Differences

Earnings Versus Valuation:

While company earnings are a significant factor in determining valuation, earnings and valuation are not the same. Valuation is the pivot point around which sell-side advisors determine a pricing strategy, and that process typically involves using more than one valuation model. Some of those models lean more on earnings than others, and some valuation models consider earnings only insofar as they provide a comparison to other similarly-sized businesses in the company’s sector.

Valuation Versus Sales Price:

The distinction between sale price and valuation is similar to the relationship between earnings and valuation. They are closely related, but they are not the same. Moving from industry standard valuation models into pricing strategy is where expert sell-side M&A advisors like Optima earn our keep – knowledge of your business, understanding of the market in which your business operates, and the ability to present objective information to potential buyers in a compelling way to establish advantageous pricing is what drives us.

Dream Price Versus Realistic Pricing:

While a founder views their company through years of effort and emotional investment, the market sees it through numbers, analysis, and risk-adjusted return. At Optima, we often compare those two differing visions of pricing to the way in which home sellers’ view compares to pricing on Zillow. Your fond Thanksgiving memories don’t affect home prices in the same way that your total personal commitment to a business’s success doesn’t affect the sale price of the company. It’s a tough but important conversation to have, and it’s one of the most important reasons to work with an experienced, expert sell-side advisor that you trust.

2. Focus on Earnings Versus Ongoing Operations.

From the first inkling for business owners that a sale is on the horizon, however near or distant, considering how total outsiders would view the enterprise when looking at it carefully is an essential perspective. Simply put, the first step is to get your house in order: physically, operationally, and financially. Being ready long in advance allows business sellers to negotiate from a position of strength, and that has a direct impact on perceived value and therefore price. Simply focusing on earnings misses what is important to potential buyers.

Here are some general guidelines for preparing your business for a sale and maximizing value:

1. Make sure company financials are clean, accurate, and detailed in a way that meets sound financial accounting standards, helps identify strengths and weaknesses of the business in detail, and can assist any potential buyer’s analysis.
2. Fix all those niggling details in facilities and operations – software updates, vehicle maintenance, facility repairs – all the stuff that you and your staff are comfortable dealing with day-to-day but which may not make the best first impression. Make and maintain a detailed tick list and get it all done.
3. Take a hard look at client relations, whether operating and safety protocols are well-documented and maintained, whether employee relations and benefits are sound and up to date, etc.
4. Consider whether the business will survive your own exit while maintaining value. Quality leadership empowered to make decisions without you, trusted by the staff, clients, contractors, and vendors, are tell-tale signs of a strong, valuable enterprise that’s been managed well.

3. Seller’s Preferences Determine Strategy

At Optima Mergers & Acquisitions, we understand that every company, every business owner is unique. What underlies each owner’s decision to explore a sale of the business they’ve worked so hard to develop is in fact personal, and that is an essential component of a sell-side strategy. It is our role as sell-side advisors to work within that reality, to make sure that our clients have realistic expectations, and to work together to achieve the best possible outcome in light of the circumstances.

Some owners simply need a quick exit. Critically, speed and haste are different, so expert sell-side advisors can work within tight time constraints and help those clients understand the impact their desire for speed will have on the ultimate outcome. Although a rushed sale customarily results in lower proceeds or heightened transaction risks, it is nonetheless the job of M&A advisors to work within their client’s needs to obtain the best result.

Optima Mergers & Acquisitions is committed to engineering exit strategies and transactions that meet the unique needs and circumstances of each client. The extent and breadth of our experience allow us to help generate the best possible results for the sale of any business, particularly when we are involved from the outset. Contact our team today and let’s have a big picture conversation about your goals, your concerns, and your business, and then set you up for a successful exit and your business on the path to a fruitful future.