One of the challenges that we often face is correlating value to “sellability.” In many cases a business may have value to the owner, but there may be a very limited market for the company. (In fact, this notion is the basis of the concept of a Discount for Marketability.) For example, a small 3-person company with a single working owner may generate significant value for the owner. But that same business might not have significant conveyable value to a buyer.
I know – you’re like us and crave data. Consider this: BizBuySell.com recently released their annual survey of businesses sold, totaling 7056 completed deals. Can you guess how many businesses were listed on the site? 45,000. So 15.7% sold. Clearly there is an issue of sellability here.
So what is a business owner to do?
One of the biggest reasons we see for businesses having a difficulty converting value in a business to an actual sale is the risk profile of the business. Buyers are nothing if not risk averse. While you may in principal agree early on on a purchase price, expect that a nervous buyer will hem and haw as due diligence progresses. (By the way – experienced M&A folks will tell you that the purchase price never goes up after the LOI… it only goes down).
So how does a smart business owner mitigate risk? This is actually a critical area that your business valuation expert can help you with. By identifying and mitigate risk factors early you can help increase the confidence your buyer has in the transaction.
Hand in hand with the buyer’s risk perception is their lack of clarity on what happens post closing. What’s going to happen when you hand over the keys? Who’s in charge? Who opens the building? Where are sales coming from?
As a seller you can mitigate these concerns by 1) replacing yourself as a critical piece of the business and 2) providing a lengthy, well considered transition. A seller should consider hiring a replacement to take some of the workload off themselves. Not only does this improve your quality of life, but also lessens the dependence that the business has on you personally. Further, by working at the company post closing you can help maintain a level of continuity.
Structure the Deal
Did you know that most deals aren’t all cash at closing? In fact, a recent study suggested that well over half of deals have some portion of purchase price paid post closing and contingent on future performance. (These structures are often referred to as “earn outs”). So why should you be smart about deal structure? Simple:
- Get the deal done. You want to sell the company, right? Being inflexible on structure is the perfect recipe for killing a deal.
- Get paid more. Want an all cash deal? Expect the buyer to price in risk and pay less. Much less. But if you want to get paid for future growth and performance…. well an earn out is just the ticket.
It’s not enough to simply “list” a business for sale. Selling a business is hard work, and a business is not sellable without establishing a process to do so. Business owners who are truly successful in achieving an exit – and maximizing the value for their business- are proactive about exit planning and deal structuring.