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Gaining Maximum Value When Selling A Business
Posted by B2B on: 2006-03-24 09:34:46
Gaining Maximum Value When Selling A Business
Richard Rodnick
All business owners face one inescapable fact: sooner or later, they will leave the business and ownership will change hands. The crucial question is whether the process leaves them wealthy and satisfied,or disappointed and regretful.
Naturally, owners of private businesses hope to earn as much as possible when selling their companies. Yet the distressing reality is that most entrepreneurs fail to gain full valuefrom the sale of their businesses.
I have worked with the owners of hundreds of small and mid-sized businesses, helping them achieve maximum value from the sale of their companies. Over the years, I have identified a variety of mistakes that keep owners from getting what they deserve for businesses they often have spent a lifetime building. Following are some of the most common errors to avoid.
Using a standard formula to value the business
An owner considering the sale of his or her business must first determine its value to potential buyers. Selling a business without knowing its value is like playing poker without looking at the cards - in this case gambling with what may be one's single greatest financial asset.
One of the worst things an owner can do is value the business on the basis of a standard formula, especially one that focuses on its historical financial performance. Strategic buyers - the ones willing and able to pay a premium for the company -- buy the future, not the past. Although it's necessary to present recent financials (recast to provide a view of the business as though it were a profit center of a larger corporation, rather than a private business), the emphasis should be on developing pro forma financials that reveal the company's potential under new ownership.
To be persuasive, these pro forma financials must be credible, which requires extensive market research and analysis to justify the reasonableness of assumptions regarding revenue and profitability trends, growth rates, market dynamics and other factors.
Focusing on the Wrong Prospective Buyers
It is all too common for company owners to assume that local competitors, major customers, employees or a significant vendor represent the best buyer prospects. In reality, these are often the worst buyers, since they often base purchase decisions on the desire to acquire assets, consolidate redundant functions and cut costs. Moreover, such companies rarely have the necessary financial resources and frequently even require the owner to help finance the transaction.
Savvy owners look beyond these prospects and seek strategic buyers able to pay a premium to acquire future growth and the company's intangibles - not just its assets. These buyers are typically large private and public corporations and private equity groups. Such companies are not limited to the U.S.; many of the most attractive buyers come from Europe and Asia.
Ignoring Timing Issues.Or Considering It Only From Their Perspective
A real estate maxim states that the three most important considerations are location, location, and location. The M&A equivalent is timing, timing and timing. (If you don't think timing is important, ask yourself if you would rather try to sell a dot-com company today versus four or five years ago.) Many sellers make a big mistake by focusing on their own preference, rather than selling when timing is right for the buyer and when economic conditions are fortuitous.
In my experience, the average owner sells three to seven years after the most propitious time for a sale. In some cases they fail to anticipate a change in the market, or wait until a personal or professional crisis necessitates sale of the business. Whatever the cause, delay can erode value.
In addition, owners often underestimate the time required to sell a business. Astute owners develop an exit strategy long before they expect to sell the business. They understand that it typically takes 12 to 18 months to prepare for and complete a transaction. Moreover, they understand that the new owner may want them to remain with the company for a period of time following the sale to assist with the transition and help guide integration of the two organizations.
Using the Wrong People as Dealmakers
Owners of private businesses frequently rely on their accountants to help them value their company and serve as dealmaker. Others have their attorneys play these crucial roles. This is understandable; after all, such professionals have gained trust and credibility through years of valuable service, and they often can play a significant role in the sales process. However, few have the knowledge and experience needed to effectively value a company -- let alone the time, resources and national and international contacts necessary to serve as a dealmaker.
Many business owners make a greater mistake by trying to manage the deal process themselves. It is the rare owner who has the expertise necessary to manage this complicated process. Most have emotional attachments to their businesses that preclude objectivity. Yet the main reason why owners should not as serve as dealmaker: they can become distracted from their primary responsibility - running the company. Without their leadership, company performance usually suffers, which in turn diminishes company value.
Done properly, the sale of a business can be one of an entrepreneur's most rewarding and exhilarating experiences. Conversely, a poorly handled transaction can be the most costly mistake an owner can make. Becoming educated on the process may be the best investment an owner can make.
About the author:
Richard M. Rodnick is founder of RSM EquCo. RSM EquiCo is a global provider of investment banking services to private companies with revenues of up to $500 million. For more information go to: http://www.rsmequico.com.
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