The subject of selling companies is inundated with information and instruction, but unfortunately, a significant portion of it lacks real-world deal-making experience. Consequently, it becomes challenging for business owners to make informed decisions and maximise their returns on the most important sale they will ever make.
At INSIGHT, we firmly believe that selling a company requires a proactive sales and marketing approach, therefore over the next eight blog posts we are taking each of the eight principles that stem from that conviction. These principles are not just theoretical but have been repeatedly tested and validated over our extensive history of selling companies in a significant number of industries.
Principle Two - Beware of Traditional Valuation Methods
While traditional valuation methods tend to focus on short-term return on investment, such as valuing a company based on a multiple of its past profits, this approach overlooks future potential and assumes that past performance is the sole indicator of a company's value. At INSIGHT, we believe that this traditional thinking is fundamentally flawed.
To address this issue, we at INSIGHT use the "2x rule." To sell one company, we typically identify and communicate with a large number of buyers, a process that takes us around 2-3 months to qualify down to 5-10 serious candidates. Once we've reached this advanced stage of negotiation, we invite the candidates to submit competitive offers using our highly effective bidding process. Generally, we receive between 3 and 4 bids, with the lowest bid usually reflecting a traditional accounting valuation and the highest bid frequently being twice that amount.
At INSIGHT, we believe that this approach allows us to more accurately capture the true value of a company by taking into account both past performance and future potential. The 2x rule emphasizes the importance of thoroughly assessing a company's potential for growth and success and leveraging that information to secure the best possible outcome for our clients.
Have you ever wondered why one company is willing to pay significantly more than another for the same business? The answer lies in a number of factors, including the establishment of a competitive bidding environment, the ability to sell future opportunities, and the motivations driving a buyer's decision to purchase a particular company.
Despite what some may claim, valuing a business is not as simple as applying a multiple to past profits. True value is determined by the motives of potential buyers and what the business will look like under new ownership. This means that it is never wise to attach a specific value to your company before taking it to market. In fact, doing so can be a costly mistake and one that is all too common in our industry.
At INSIGHT, we understand the importance of carefully considering all relevant factors when selling a business, from the motivations of potential buyers to the opportunities for future growth and success. Our approach emphasizes the importance of creating a competitive bidding environment that allows us to capture the true value of a company and secure the best possible outcome for our clients.
For further information you can read our guidebooks:
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