3 Secrets to making your business more sellable
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, three-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.
Consider this: BizBuySell.com releases an annual survey of businesses sold. According to its Insights Report, “annual small business transactions reached record levels in 2016, topping 2015's totals by 8.6 percent and 2014's previous high by 4.6 percent,” totaling 7,842 completed deals. The site reports that they have approximately 45,000 businesses for sale, meaning a mere 16 percent of those listed were sold.
Clearly there is an issue of sellability here. What is a business owner to do?
1. Understand (and mitigate) risk
One of the biggest reasons we see for businesses having 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 principle agree on a purchase price early in the process, 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 letter of intent. 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 navigate. By identifying and mitigating risk factors early, you can help increase the confidence your buyer has in the transaction.
2. Prepare for a smooth transition
Hand in hand with the buyer’s risk perception is his or her 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 out of your business. 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 until your replacement is settled in, you can help maintain a level of continuity.
3. Structure the deal
Did you know that most deals aren’t all cash at closing? In my previous role as an M&A adviser, it was common to see well over half of deals having some portion of the 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.
About the Author
Dan Doran, CVA is the founder and principal of Quantive Business Valuations, a certified valuation practice serving privately held businesses nationwide. Learn more at quantivevaluations.com.