Amongst other endeavours in my career, I have been a realtor, a business broker, and an M&A advisor. In each role, I have been fortunate enough to serve a variety of business owners, along with buying and selling businesses of my own. Concerning the topic of this article, over time, I have learned that each business situation is different, and there is no one-size-fits-all solution regarding representation.
For the purpose of this post, there are too many variables to write a single answer, and each reader's business will have a different profit position. To simplify, I put together six information tables, allowing readers to quickly jump to the relevant table for their business size. My hope is this material will help readers through the representation decision-making process.
In a general sense, having an experienced intermediary on your transaction team will increase your probability of sale, and (even after fees) increase your net transaction proceeds. Small businesses doing under $250,000 a year in revenue should consider selling on their own, and every other business owner should build a network of advisors around them, who are focused on distributing the workload, reducing deal risk, and increasing cash at close.
For context, please read the assumptions, and the definitions before reviewing the tables.
Scott Duke is the owner of GatewayCapital, a business transition advisory firm, and can be found on LinkedIn at www.linkedin.com/in/welstand
In early 2018, likely a result of binge following Gary Vaynerchuk, and Tai Lopez, I thought it would be a good idea to torment myself for a month and a half by reading a new book each day on - how to sell your business. I then committed to sharing the knowledge with the world in daily YouTube videos. This article is a condensation of the lessons learned, and the top five - how to sell your business - books.
Business Transition Lessons:
Want more detail? Check Out The - 44 day Challenge
The Top Five Books:
3) Equicapita's Little Book of What Next? - Steven Johnston
4) How To Sell Your Mid-Size Business - Ney Grant
5) Built to Sell - John Warrillow
Some people may be wondering, why 44 books, and why not 45, or 46? The reason was simple, the initial search on Amazon for "How to Sell My Business," came up with 44 books. I bought them all and was off to the races. I spent two hours each morning reading and pulling the best lessons out of each book, and then took 30 minutes to record the video. Later in the process, I was paying someone to do the editing. Overall, most of the books (while informative) were blatant sales pitches for broker services. Despite this fact, there were a handful of gems which I am thankful the authors shared with the world. If you are thinking about selling your company, the list above is worth investing your time and money.
The question - what is my business worth? - Or similar valuation questions, are the most commonly asked by business owners contemplating a sale. Ironically, along with it being the wrong question, it is a difficult inquiry for even seasoned experts to answer correctly. Ask five valuation professionals the value of your business and guaranteed, you will receive five different answers.
In this article, I propose three questions to ponder before valuation considerations become necessary or relevant.
Let's first set the table with a few key (and hard) truths to help frame our discussion:
NOTE - so you don't think I am a pessimist out here throwing internet punches, I have had my share of companies that never came close to getting a seat at the table, faded into oblivion, or were liquidated. I have also successfully sold multiple business, and simplified the process by focusing on the questions below.
If asking - what's my business worth - is not the right question, what questions should owners actually be asking?
Question One - Will my business attract a buyer?
24% of the listings on BizBuySell.com - 8,360 businesses - sold in 2018; indicating the other 25,000 listings stagnated, not attracting any buyers. Perhaps, the pertinent question for these 25,000 owners shouldn't be - what is my business worth? Instead, asking will my business attract buyers? Or, is my business even sellable? Would be a better line of questioning. Undoubtedly, if the goal is to sell, this line of thinking would get them to their desired goals more quickly.
Question Two - Is my business transferable?
I often contemplate why owners so infrequently consider transferability when contemplating a sale. For example, if a company's lease is not assignable, this issue is a deal killer, and there is a low chance the business will ever sell. What about franchise agreements, regulatory constraints, owner dependency, specialized licensing, or contract assignability? Regrettably, transfer restrictions dramatically reduce the probability of a successful sale. Perhaps, the question owners should be asking is - if someone wanted to buy my business, could it easily be transferred?
Question Three - How risky is my business?
Statistically, the small business asset class is one of the riskiest investments in the world. The average business owner makes peace with this by believing their skills and leadership will mitigate the riskiness of the venture; personality traits that will walk out the door when the company sells. Buyers are notably cognizant of this truth, along with the 45 other hazards that contribute to small business risk. Accordingly, if higher risk levels demand more substantial returns, and higher expected returns drive down the price, why is it that owners aren’t asking - how risky is my business?
Question Four - What is my company worth?
It is the author's opinion, only companies able to navigate the first three "hurdle" questions, need to worry about valuation considerations; as they are the only businesses the marketplace acquires.
CAUTION - valuation experts, appraisers, accountants, and brokers will be all too happy to take your money, perform a valuation and ignore key facts rendering your business unsellable.
To sum up, don't dwell on what your company is worth today, concentrate on transferability, and creating a predictable low-risk cash flow stream for a potential buyer. Focus on the first three questions in this article will earn you a seat at the seller's table, attract more buyers, and ultimately increase your price on closing day.
For those owners who have taken the time to implement transferability, predictability, and sustainability in corporate cash flows, here are a few great resources on business valuation which I find incredibly useful.
• Ken Sanginario - Valuation Podcast-
• Business Reference Guide - https://www.businessrg.com/
• Business Valuation Resources - https://www.bvresources.com/
For those more interested in how to reduce risk, increase transferability, and attract buyer interest, you are in the right place. The answers are here and free in our blueprint document.
2019 GatewayCapital Marketing and Innovation Inc.