A couple of years ago I was helping a client buy a business.
One of the businesses we were looking at had good products, a decent brand, but failing revenues and profits. The Owner had tinkered with the products over many years but had been distracted by real estate investments and an overall waning interest due to the new chapter of his life he had entered. His kids were grown, through college and on to different careers. They weren’t interested in the business. He was tired, you could hear it. He just had other things he wanted to do.
The owner was a serial inventor, with super ideas but he had let the business had tank. When I say ‘tank’ I mean it. Revenues and Net Income had dropped 50% year over year. And now, with a healthy sprinkling of fairy dust thinking, he shared projections with me that the business would be growing 183% in the coming year.
He told me about how the business was ready to take off, he had this product, that product, this patent, that patent. He said he had strong brand loyalty, and people never bought anything else after they bought his products. What a great name he had for the products, amazing conversations with retail outlets he was having, etc. To hear him tell it, he had many folks ready to buy both the products and the business.
But the numbers weren’t there and the narrative didn’t add up.
I never want to waste an owner’s time so we had put a value range right on the table at the beginning of the conversation. After we learned more, we put finer point on it: my client will pay $X in CASH for your business. We were within the range we had given him to open the conversation. We would close in 30 days.
After several painful conversations he said “David, I have to get $Y for this”.
And there it was. He went on to tell me how hard he’d worked, how much value the IP and Brand had, and he couldn’t take anything less than his number. But his number was way outside of our range. We passed on it, right away, without hesitation. Because it wasn’t worth what he wanted.
The bottom line is this. You may have awesome products, intellectual property, patents, copyrights, process, brand presence, and even customer/client relationships. But buyers really pay for a predictable stream of future cash flows. More for demonstrated growth.
Brand without revenue has less value. Revenue without growth has less value.
Don’t wait until you want or worse have to sell to engage in understanding what actually will sell.
Epilogue. I told this owner exactly what he needed to hear but didn’t want to hear. He had lost a cash buyer, and believe me, cash buyers don’t fall off of trees. He took my advice, he’s back to the grindstone but to date has not been able to find an interested buyer.
The ONE WEIRD TRICK every Entrepreneur must use to sell their company!
I was inspired by a recent post of this type to tell you, business owner, that over simplified information of this type can often be misleading.
Because, actually, there are like 175 things you need to do. And I may be underestimating. A lot
You see a full 45% of sellers decide to sell when they were not planning on it, according the National Center for the Middlemarket. No bullet point article is going to help you if one buyer comes a-calling because, I can almost guarantee that you’re not ready.
So here’s your one weird trick: selling a business should only come after carefully preparing the business for sale. And proper preparation takes 3-5X the time you spend executing the deal. You didn’t build a successful business overnight - you can’t prepare to exit overnight either.
The good news is that there is a formulaic approach, and tools, and process to be used. But remember that there is no pre-packaged formula for you and your situation; you and your business.
This is why you need to find a great advisor that will care about you, your business, and help you maximize your outcome. Start early and you’ll be glad you did.
When Claude Rains declares “Round up the usual suspects” in Casablanca he really could have been talking about the average approach to lower middle market M&A. That is to say, most firms focus on roughly 100-150 likely buyers when they market a company for sale.
At the core of our beliefs, among many other things, is the fundamental agreement we live by: that we will never know enough about potential buyers to take a narrow approach. How is that for you?
What we’re saying in fact is “we don’t know”
When you break this admission down into its components, this fearless embrace of the unknown in fact gives our clients a great deal of confidence in our approach. Here is why.
Our approach is built on thoroughly exploring each these possibilities with our clients, conducting exhaustive buyer research, and producing buyer target lists that routinely have 5X potential buyers than the average investment bank.
We want more buyers because more buyers give our clients the opportunity to extract the maximum value in a sale transaction. And in the end what we’ve found is that 3/4 of the time our clients had never heard of their ultimate buyer.
That’s why we don’t just cover a couple of hundred ‘likely’ buyers. Our experience is that it’s also absolutely critical to round up the UN-usual suspects.
There's nothing worse than a Backseat Driver. Or the Monday Morning Quarterback. Business owners are constantly offered advice from 'trusted' advisors who don't have a stake in the Owner's best interest as much as a stake in keeping the money train rolling.
When it comes to an exit who can tell a business owner how to prepare? Lawyers can certainly be counted on to minimize risk in a transaction. Accountants can certainly be counted on to prepare statements to GAAP and if they're tax specialists to minimize taxes. Many groups purport to help business owners with councils, coaching, and expensive consulting.
But when you stop and think about it, who knows more about value in the market place than those who are actually doing deals? It stands to reason then that if you're a business owner thinking about an exit in 1-5 years, you should be speaking with a business advisor, a dealmaker, a merger & acquisition specialist now.
We here at Harbinger Partners use a best-in-class, proven value building system combined with a customized online coaching module to guide business owners to real, sustainable value improvement. Not theories. Not business school bologna. Outcome based, real-world-actionable, measurable and programmatic.
And when Lawyers and Accountants offer that, please let me know.
There are many places that a good Intermediary can add value (just check out this article: http://www.axial.net/forum/2-ways-investment-bankers-add-value-ma/ ) but one of the things that Intermediaries should be especially careful with is a Business Owner's time.
That leads me to what I call the "Casual Buyer". The Casual Buyer comes from all walks of life. Former private equity folks that didn't get the promotion they were looking for and decided to go out on their own. Wealthy individuals who made their money selling other businesses or just have some family money to 'play with, and unfunded sponsors to name a few.
The interesting thing is, these buyers can all be legitmate and good buyers. As a Business Owner, you need to be aware that not all buyers from the same 'categories' are the same. Even when they have cash. A good Intermediary will weed these folks out and not waste the Business Owner's time.
Not too long ago I was working on a deal where the buyer spent the majority of our first phone call telling me why the deal wasn't for them. If they invested the same amount of cash in their core operation they would make 8x return in 5 years. The business for sale was 'too far away'. They didn't have any direct experience in the field. They were asking about what kind of structure the business owner would take and the value he would take and were disappointed to hear the business had grown.
To me, buyers like this, who often view themselves as 'value' buyers are looking at a deal precisely because the 8x return they espouse to have is not actually available to them - otherwise they'd invest there. Ironically these 'value' buyers actually don't see the value that the Business Owner has built - which is why I call them "Casual Buyers". I do not let these Casual Buyers get anywhere near the Business Owners I represent.
Originally published on Axial Forum: http://www.axial.net/forum/get-top-valuation-business/