By Evan Rubenstein
When it comes to selling a business after many years of hard work, will you walk away with a tidy fortune or suffer the gut-wrenching price disappointment that is so common? Many hard working business owners live for the day that they can sell their business and retire comfortably on the proceeds. Yet when that day comes they discover that there is no queue of buyers eager to make a purchase, and in reality the business is only worth a fraction of what they originally thought.
A business is not a commodity that people are buying every day. Any person or business looking to acquire a business will usually have more than one option that they are looking at. When one is selling a business by contrast, you will generally only be dealing with one potential buyer, so the odds of making a sale are stacked against you.
When selling a business, a scarcity of interested parties has the effect of lowering the selling price
Prospective buyers, especially if they know they have no competition, have nothing to lose and everything to gain by submitting a low-ball offer. And they will.
But, you say, you’ve heard stories of other people selling their business and doing really well? And of course that may well be true. What you don’t know about is what they did to prepare and how they conducted the negotiations and the sale.
The common perception is that a solid profit history is the key determinant of value. It is very important no doubt, but by no means everything. A potential buyer sees a business differently to a seller. Sure, profitability is up there, but they will have a number of other criteria in mind that will play heavily in determining the business they decide to buy. The person selling the business is often quite oblivious to the importance and impact these criteria will have to the value and sellability of the business. After all, the business is doing fine, what more do you need, right?
Past profitability is not an accurate indicator of future value
This is at the heart of the matter. A business buyer is not buying history, he or she or it (in the case of a corporate entity) is buying the future! They are looking at a business’s ability to provide reliable, sustained profitability and cashflow in relation to comparable investments. Also in the mix is the amount of effort that will be needed to operate the business. So the details of how your business is set up and operates as a going concern, become very important in determining not only the value of the business to the prospective buyer but also its desirability. And it may not measure up that well in the buyer’s eyes..
So what are the ‘Deal Damagers’?
Apart from the underlying financial performance, here are some other issues that will factor into the value of the business:
- How involved is the current owner in the running of the business?
- Does the business have too much dependence on any staff member, customer or supplier?
- What are the customer satisfaction levels of the business?
- How much working capital is required to operate the business?
- What proportion of revenue is recurring?
- How much market share/competition does the business have
- As it stands, can the business expect to grow?
This all seems like common sense, and it is. Yet time and time again, businesses for sale fall (expensively) short in one or more of these areas. If they are not adequately addressed and if the owner is eager to sell within a short period of time the only yield point is price. The best strategy is to recognise these shortcomings in the business and address them in a timely manner. In this way, when the business goes on to the market, there will be no flaws for a potential buyer to fixate on and the business will be able to achieve its highest possible valuation.
How to ensure maximum value by the time you want to sell
- Have a strategic plan with timelines for your exit well thought through and sufficiently generous to allow for all the work that needs to be done to take place well in advance
- Don’t leave out the things that you don’t like doing or don’t understand.
- Get professional advice and help. Unless you’ve done this a few times before, don’t go it alone. By doing so you put a considerable proportion of realizable value at risk.
A good way of assessing how your business measures up from a business valuation point of view is to use the free Value Builder System™ assessment. The Value Builder System™ assessment will give you a score out of 100 that gives a statistically valid relative measure of how well your business measures up. Once you have this score, you will have a pretty good idea of where your business stands in relation to achieving its maximum possible valuation.
Click here to do your free Value Builder System™ assessment.