The Valuation Gap: Helping Clients Set Realistic Expectations Before It Costs Them the Deal
Unrealistic seller valuation expectations have long been the single biggest reason deals in the UK & Ireland mid-market fall through. This edition of Dealsuite’s M&A Monitor asked advisors directly about it for the first time, and the numbers are worth sitting with.
How common is it, and what does it look like
In 49% of transaction processes, advisors report that the seller’s own view of value is too high. Where that gap exists, it averages a 23% deviation from realistic market value. And in 24% of those cases, the gap is what ultimately breaks the deal.
Most valuations in this market are expressed as a multiple of EBITDA, which stands for earnings before interest, tax, depreciation and amortisation, a standard measure of a company’s underlying trading profit. It’s this multiple that buyer and seller most often disagree on, and it’s the number a client needs to understand well before they’re sitting across from a buyer.
Why this is your conversation to start, not just ours
Owners naturally value a business on what it means to them: the years invested, the risk carried, the plans they once had for it. A buyer values it on the cash flow it will generate and the risk of that cash flow not materialising. Those two views rarely start in the same place.
As the client’s accountant, you’re usually the first person they tell when they start thinking about selling, often long before we hear about it. That makes you the best-placed person to introduce a realistic starting point, before the client sets an expectation with family or a prospective buyer that becomes hard to walk back later.
What a realistic starting point looks like
The average EBITDA multiple across UK & Ireland sectors currently sits at 5.4x, though it ranges widely, from around 3.5x in retail trade up to around 8x in software development and healthcare. Company size moves the number further still: our companion piece on the small firm premium sets out exactly how much.
An early, independent view of value, given before a number is fixed in a client’s mind, is one of the most useful things an advisor can put in front of a client considering a sale.
Naming the risk
A mismatched valuation doesn’t just risk one buyer walking away. Handled badly, or discovered too late in a process, it can put a client off selling altogether, even when selling was the right call. Getting the number right early protects the deal and the client’s confidence in the process.
If you have a client who’s started talking about a sale, or who you suspect is closer to that decision than they’re letting on, we’re happy to give an early, no-obligation read on realistic value before things go further.