Planning an exit or being forced to consider selling your business are two of the most likely scenarios any business owner either relishes or dreads, depending on the circumstances.
However, whether you are in control and the exit process is deliberated and measured; or the decision has been forced on you, due to other circumstances outside your control, there are some factors that adversely affect your exit value. Yet, you can still have some influence over some of these ‘less than obvious’ usual suspects:
- Lack of succession planning
This might not seem that obvious at first, however, the EBITDA (income multiple adjustment) the broker suggests to add back as the compensation paid out to the owners / shareholders of the business is not realistic at all. The prospective purchaser will most certainly also want to be rewarded for their effort in either running or managing the business going forward. Or, at the very least, they will have to hire a manager to do this, hence, if you can demonstrate that you have thought about this and put in place a suitable replacement, via succession planning, then the adjustment to EBITDA will be justified and you’ll get closer to your income multiple price valuation. If, not, expect all buyers to chip away at your initial broker led valuation.
- Lack of negotiation preparation
Again, not the most obvious ‘readiness’ guide; however, we find that a lot of business owners, although they might have been brilliant business developers or sales focussed / deal closer negotiators, find navigating the world of a business exit negotiation quite tricky. Some of the factors we experience are listed below and will be explored further in this article series:
- Not understanding or knowing my own financial statement numbers
- No appreciation of the financing aspect of the buyer’s offer, whether that is some form of leveraged buy-out, seller-based finance or any other combination of options. It is well worth thinking this through, and spending some time considering various angles and possible compromise scenarios
- Lack of understanding the process
Our advice is to ask as many leading and ‘not so obvious’ questions of the broker at this stage of the transaction, so that any misunderstandings, misinterpretations or plain mis-selling does not hamper and either delay of scupper entirely the process, once a willing and able buyer has been identified. Ensure you are in contact with the broker regularly, to find out who has made enquiries, what filters and gate-keeping activity they have performed, etc.
Tip for success: You are in charge of the process, not the broker. You issued the instruction and you will pay the broker on whatever basis or formula you have agreed to in the contract. Hence, think of this as a “performance management” exercise, just like you would want to manage the performance and be kept up to date by employees or any other professional services providers. You need feedback, market intelligence then drive the process, even though you are not running the process.
If this sounds familiar and you want to explore some of the items in this article further, please book a no obligation and free of charge initial 30 minute consultation with me this booking link.
In the next instalment of this series, we will focus on some more obvious reasons why the initial valuation of the business for sale is wide of the mark compared to the actual realised sales price.
