Vendor bias and other reasons for business overvaluation

  • by David Pottingham 
Sell a business

Perhaps the most powerful recommendation for hiring a professional when selling a business is their impartiality.

As Derek Burgoyne of Cornerstone Business Agents explains: "The sad truth is that of the many thousands of businesses currently on the market, the majority are set at an extremely optimistic asking price – to put it mildly. This is the price the business owner would like to achieve and no one has put him or her right.”

This is why you should seek objective advice of an agent who also has superior expertise in valuing businesses. That said, he admits, “even if good advice is given, it is often ignored.”

There are reasons for inflated business values beyond the owner’s sentimental attachment to the business. With the help of Derek Burgoyne, here they are:

  • This is the price the business owner needs to achieve – to cover loans, pay the agents, banks and other creditors
  • An inexperienced agent has suggested the price (probably overvaluing to impress the client)
  • Similarly, but more cynically, an agent suggests the price to gain the instruction as a sole-selling agent and get a large up-front fee (they can suggest lowering the price later if scant interest is generated)
  • Lack of financial information supplied to the agent, who then has to value on verbal indications of turnover and profitability. As most owners who want to sell a business usually overestimate their turnover and profitability, the business is often thus overvalued