Small and medium business owners who make the difficult decision to sell their businesses are facing a sobering reality check as a widening gap between valuations and expectations threatens their exit plans.

Many are becoming disillusioned when they discover there is a huge discrepancy between the numbers of buyers and listings, and are disappointed by what buyers are willing to pay.

Geoff Farrell from ConnectBiz Advisers & Business Brokers speaks daily to vendors who share a misconception over pricing and are often unfamiliar with market dynamics and trends. “70 to 80 cent of businesses that go to market don’t actually sell, so it’s a shockingly high amount,” he says. For owner-operators at the lower end of the market, the figure is closer to 80-90 per cent. “It’s not always right to list a business for sale. There might be some work you need to put in to get the result that you want.”

For SME owners, this means playing a long game: monitoring the market and taking the time to build a clean, self-sustaining operation that will survive without them.

The Value Of A Business Can Take Its Owner By Surprise

Farrell says unrealistic estimates of what a business is worth stems from owners relying on traditional methodologies which valued an enterprise at two to three times earnings. “While that may be true at the top end of town, it doesn’t always apply in the smaller business space,” he explains.

Part of the problem is a wage gap that makes SME ownership less appealing when that calculation is used. Farrell gives the example of an SME owner who’s making $200,000 annually from their business, so they set the value at $500,000. “What you’re effectively asking someone to pay is half-a-million dollars in comparison to what they could make as a wage,” he says. He points out that an ambitious potential buyer may have the skills to land a salaried role paying $150,000. “The decision becomes, ‘Why would I invest half-a-million dollars to make an extra 50 grand a year when I’m taking a lot more risk and not getting super and sick leave, and not in debt to make the money?’”

A founder’s reluctance to accept their business is worth less than they envisaged is understandable. “It’s your baby. It’s your identity,” Farrell acknowledges. “People say, ‘If I’m not a business owner, what am I?’ And there’s a psychological journey you go through to be ready to sell. When you get to that point, and you’re told it’s not worth as much as you think, it can sting and feel personal.” Vendors also equate value with the effort they have put into the business and the lifestyle it has funded, whereas buyers look purely through a return on investment lens.

Farrell points to a question used by his licensee and mentor Mic Pilon, who has grown and sold multi-million dollar franchise enterprises: is your business an asset, an ATM or a job? “An asset is a business you can build and, at the end of the day, you can sell it. It might form part of your retirement plan,” he explains. An ‘ATM’ business provides cashflow to fund a certain lifestyle, and there may be no intention to sell. “The third is a business where you are the business. Everything revolves around you, and it’s ultimately just a job that you’ve bought,” he says. Investors are less attracted by this category, where supplier and client relationships run through the founder and may not survive without them. “Why would someone buy a job when they could just apply for a job and not be in debt?” he asks. “We believe every business should be an ATM or an asset or a combination of both.”

The Generational Trend Behind A Wave Of Exits

One of the most influential trends in the business sales market, Farrell claims, is a tendency for some brokers to be geared more towards listings than sales, creating a glut of overpriced entities they are not incentivised to sell.

Demographics are also coming into play. “There’s a bit of a generational shift that we’re seeing from the baby boomers. It’s been dubbed the silver tsunami, a mass exiting of good businesses in that generation,” he explains. These owners were raised at a time when a business was viewed as a vehicle for building wealth, and decades of hard work and sacrifice were considered inevitable. But these views aren’t shared by the new pool of buyers.

“The newer generation is more acutely aware of lifestyle and family, and that seems to be more prioritised than getting into business with all the compliance and risk that business owners face these days,” he observes. “Because of that, there’s more sellers than there are genuine buyers. It’s definitely driven prices down because everything comes down to supply and demand.”

Farrell says buyers tend to fall into four categories. The first is the owner-operator, who is looking to buy a business and work in it. The second is an investor who wants a passive income stream while remaining at arm’s length while the third, at the upper end of the medium enterprise market, is a private equity buyer. Fourth is someone who wants to grow their own business through acquisition, such as a competitor or a complementary venture that serves the same customer base.

A good broker will act as matchmaker, Farrell says. “You need to have the correct strategy to match who you’re trying to reach, rather than just putting it online and seeing what sticks,” he says.

Assessing the market for the right time to sell can also be difficult. Global uncertainty around issues such as tariffs has made buyers and sellers apprehensive. But he points out that no one has a crystal ball. “It’s like trying to play the stocks,” he says. “You don’t know what’s going to happen, so it’s better to just be consistent and work from a plan rather than try to pick the exact right time to sell.”

Use A Three-Year Runway To Get Systems In Place

The wisest move an owner can make before selling their business is to broaden its appeal, Farrell says, by ensuring it meets as many market drivers as possible. Apart from financial performance and profitability, buyers will want to see embedded standard operating procedures so they can be confident a business’s systems will survive the founder’s departure.

Risk is another consideration, he says. Buyers demand immaculate record-keeping around governance, compliance, and legal matters to minimise risk, with automated payroll and compliance systems providing the most traceable paper trail. Market position and share are also crucial, with businesses that offer unique selling points and high brand awareness likely to garner most interest.

Growth potential is a key factor, with buyers likely to have one eye on the business and the other on the future. “It’s all well and good to have a solid history, but is the market tapped?” Farrell asks. “Are you in a market that’s trending down? What’s the runway? Can we sustain? Can we build?”

Linked to this is technological readiness, particularly in relation to AI. Buyers are asking whether small businesses have AI workflows in place and the absence of automation is already affecting value. “We just sold one that was really old school in the construction space. Everything was still written in a handwritten quote book. No customer database or anything like that,” Farrell says. “It creates more risk and the buyer sees that as ‘I’ve got to come in and do the work, so I’m not going to pay you for it.’”

Ideally, Farrell says, SME owners looking for an exit should work to a three-year time frame, with a focus on clean financials and up-to-date documentation. But it’s not a hard and fast rule. “Psychologically, you might be done, you don’t have the energy to build, and being around a business when you’re in that mindset is more likely to cause damage than it is to help it. Three years is a great time frame but there’s still a lot of things that you can implement in six months.”