Selling a business is extremely hard to accomplish. The few statistics on the matter indicate that only 20% of businesses actually sell. The real truth is that that number is too high. Most transactions are not publically reported. Chances of a company completing this transaction drastically improve after the company net profit exceeds $1 million. Of the 5.5 million businesses in the U.S., 80% generate less than $1 million in revenues, have no employees, and vanish quietly into the night.
Translation: far less than 20% of businesses sell.
You might be wondering what this has to do with evaluating an offer on your business.
If you are one of the few lucky owners who have an offer from a qualified buyer, I strongly urge you to seriously evaluate it. Chances are, it will come in far below what you were anticipating. To most business owners, this “low” offer is offending and immediately hits the trash bin.
The reason is the business owner’s over inflated perception of their business value. I continually work with business owners who valuate their company based on emotional factors, such as the years of dedication, hard work, and investment of time. It’s a common trait among entrepreneurs. In stark contrast, the offer ignores all those factors, and instead only evaluates what the buyer is willing to invest.
Supply and demand, a core component of business economics, states that the value of anything has a direct relationship to market demand. If there are not a lot of buyers looking to purchase, then a seller doesn’t have the power to demand higher prices.
Four things that do no play into the value of a business:
- What you think it’s worth,
- What the professional appraiser said,
- How much it made back in 2007,
- What a buyer “can” do with it.
Again, the business is only worth what someone is willing to pay for it.
So, if you are one of the lucky business owners who is receiving an offer, albeit low or possibly even an attempt to “steal” the business, you have four options to consider:
You’re not required to take their offer as is. Instead, counter with reasonable changes. This can include adjustments to the price or terms. Once you negotiate the best deal you can, take the offer.
Getting something for your business today is better than rolling the dice down the road. It’s likely that the business is on a downward trajectory and will only decrease value as time passes. Removing the risk and uncertainty from your life is worth serious consideration when making this decision.
2) Engineer Value Drivers
If you don’t like the price then learn what buyers are looking at to determine the value. Then work on generating “value drivers.” These components can range by the industry and business but include items such as:
- Diversifying customer base,
- Strengthening the management team,
- Updating equipment,
- Reducing debt,
- Increasing sales.
Typically this is a 12-18 month process. Take the business off the market to implement the changes, relisting it once they start to increase the value. In order to consider this option, you need to still have the fight in you to stay in for a couple more years. The value won’t drive itself.
Unfortunately, what I typically see is that when a business owner is finally ready to sell their business, they are too tired to go through this extended process.
3) Hire Turn Around and Exit Professional
You don’t have to go at this alone. There are C-Level (CEO, CFO, COO, etc.) consultants that specialize in taking a family run, private company to market.
These professionals are not cheap. It’s common for them to charge a monthly rate plus build in an incentive based upon their ability to improve the value. Structuring pay around increasing business value is crucial toward guaranteeing the results you are after.
If you are serious about strategically approaching value drivers and your exit in the business, then this setup is worth the cost.
Pull it off the market and liquidate.
Liquidation is an exit strategy. It is not failure. The key is knowing how and when to do it properly.
Liquidation takes strategic, tax, and legal planning. Timing is everything. When considering liquidation, it’s important to understand that most times the value of the business is closely tied to the value the owner brings to the company. Once the owner leaves, there is very little value.
Whatever direction you chose to take, don’t get mad when you get an offer. Any offer is a good offer, regardless of if it was what you wanted. From there you can evaluate which of the four options best fits your situation.
The key to successfully exiting your business is to have a plan. The earlier you start in the process, the earlier you can start to identify your ideal exit. This gives you the opportunity to drive value to the business, bring multiple buyers to the table, and implement a strategy with an exit consultant.
Working with us at Exit Consulting Group can drastically improve both the value and number of initial offers you receive. If you are envisioning an exit in the next one to five years, contact me today. Together we can explore your options and chart a path to your successful exit.