Owners Looking To Sell Should Use Inductive Reasoning More

Using bottom-up Inductive Reasoning can create a strong case for a sale when Deductive Reasoning won’t. Put it another way. Selling a business is essentially telling a story that is substantiated by the facts. 
According to Andy Peters is the Managing Partner at AAKEN, the potential downside of using the De-ductive Reasoning approach can be significant when considering a sale. Successfully selling an organiza-tion can be a long and arduous process. Starting the process with a self-defeating perspective can of-ten deteriorate into accepting a "so-so" deal with bad terms.  Clearly, it will adversely affect decision-making throughout.
Adds Peters, owners using Deductive Reasoning often fail to leverage the fundamental data of their business in arguing its value. I’ve seen many information memorandums replete with unsubstantiated — or even contradictory — assertions. In due diligence, a buyer that discovers undisclosed risks and liabilities can use them as leverage to renegotiate the price or terms. 
The errors associated with Deductive Reasoning also apply to common valuation methods. Many bro-kers use tools like Pratt’s Stats and Bizcomps to access data about past sale transactions. They extract information from these sources, compile it in a spreadsheet and calculate a composite-average-multiple. 
For argument's sake, let’s say the calculation results for a sample firm, let’s call it Sam’s, is 3.5. Given the company’s three-year average earnings of $1 million, a broker might recommend negotiating a $3.5 million sale price.  Let’s think about the composite average, it aggregates un-weighted results from multiple businesses. Some of the businesses in the data set may have sold for two times earn-ings, and some sold for six times, maybe more. You might liken this to arriving at the average price of cars by compiling the sale prices of three Hyundais, four Chevys, two Mercedes and a Ferrari. The real question is what business is most like Sam’s.  Coming to that conclusion requires Inductive Reasoning based on the analysis of the specifics of the business. 
No matter the company, be it a tenant improvement contractor, a metals-related business or a sign manufacturer, determining the sale and valuation potential should come from the merits of their unique cases. To do this, owners should challenge their brokers to utilize Inductive Reasoning.
Andy Peters is the Managing Partner at AAKEN Business Brokerage that helps small to mid-sized com-panies improve their operational performance to generate more profits and interest from potential buyers. He can reached at andy@aakeninc.com