Putting a business up for sale requires a look at the cold hard facts
Jeff Kraai
Exit Strategies
An amazing fact: more than 60 percent of the businesses on the market today will not sell. The question is why?
There are two very basic answers for this statistic: an unrealistic selling price and a total lack of preparation. Seemingly simple enough, they do require a lengthy explanation.
First, let’s look at the selling price problem. A proper business valuation will sometimes solve this problem for the business owner. You may be asking yourself, "Why wouldn’t a business valuation solve this problem every time?" This is also very simple: business owners often see and hear what they want to.
Oftentimes, upon the conclusion of a very comprehensive valuation presentation, a business owner will look up and say, "It must be worth more than that. I’ve been working this business for years." Then immediately follow it up with, "The potential for growth is amazing!" Everyone who owns their own business believes their empire is a gold mine.
For many owners selling their business is the single largest financial decision of their life. Many refuse to look at the facts, making the decision an emotional one. This puts every other decision after this at risk. As Jim Collins indicates in his book Good to Great, "One thing is certain…you cannot make a series of good decisions without first confronting the brutal facts."
With an overpriced business on the market business owners will wait months, sometimes even years, until the pain of waiting for their idyllic price is too much, then sell for much less than what they were hoping for. Or worse yet, shut it down because they have emotionally walked away from it and lost interest on altogether. In reality the selling price was much closer to a fair market price, which could have been achieved months or even years earlier.
Valuation methods are not an exact science. And some methods work better than others for certain industries or business models. However, by applying six to eight methods on any given business, the range of values will typically fall within 15 percent to 25 percent of each other. Though it may not be what the owner wanted to see or hear, ignoring these numbers will often create months or years of unnecessary pain and emotional angst.
Next, let’s look at the preparation problem. Because many sellers make a decision based on emotion and not hard facts, they may have also ignored the vital statistics or the "value drivers." Not only are they important to a buyer, but without them, defending an unrealistic price becomes yet more impossible. These "value drivers" may include cleanliness of financial statements, strength of management or key employees, risk factors surrounding your client base, involvement or reliance on the owner, competition, operating efficiencies, industry and market conditions, asset quality, product or service diversity, reputation and the company’s overall professional sense.
Without basic forms of preparation, defending even a realistic market price can be difficult. With many years of work and possibly the quality of your retirement at stake, both you and your business warrant some level of basic preparedness prior to a sale. Guaranteed, it will ensure a higher sales price.
Deciding to sell your business should not be a quick decision. Done right, it’s a process, a process which will maximize your financial yield, both at the point of sale and into the future.
Jeff Kraai is president of Exit Strategies Inc., specializing in confidential business sales and retirement transitions. He can be reached confidentially at 360-696-5812 or at info@perfectexit.com
