I was reminded again recently by a now former client of how little most business owners know about and appreciate selling a privately-owned concern, how unrealistic their expectations are, and how loath they are to recalibrate their expectations based on market feedback.
Without going into too much detail, this particular entrepreneur had a very small team, no systems, was the face of the business and lacked transparency. Sale price expectations were at least double what the market was prepared to pay, and an earn-out was out of the question in their view, despite the obvious necessity for one.
Reflecting upon this particularly unsatisfying engagement, it did not take long to compile the 7 Deadly Sins of Business Sellers:
1. Principal-dependence. Any small business owner should be able to demonstrate to an external party that the effects on performance of a change in ownership would be negligible. If this is not readily apparent, not only is a buyer likely to discount their pricing accordingly, but a longer-term transition period will be required.
2. Lack of price realism. “My neighbour down the street sold his company for 20 times EBIT, and my business is better than his so I think my business is worth the same”, is not an effective business valuation approach. Relying exclusively on a trusted accountant’s valuation is also not a good idea. The only true measure of value an entrepreneur should put their faith in is what the market would offer. Any more than that is a pipe dream.
3. Lack of growth. Most business acquirers are looking to achieve a better return on their investment than could be achieved in other asset classes. They are typically looking for how to extract greater value out of a business than its current owner can (or has) and to achieve exponential returns. Businesses than cannot adequately demonstrate where future growth will come from will struggle to find a buyer.
4. Poor timing. One should never try to pick the top of the market, but trying to achieve a premium sale price in challenging economic conditions is a tough ask. Better to ride it out and wait for the upturn. However if there is more urgency around the sale, be prepared to discount accordingly.
5. Inappropriate advisors. A recent client engaged a litigator to represent them in contract negotiations – not a good move. Apart from the obvious “us vs them” mentality, this particular advisor had little if any experience in the sale of businesses, so the vendor (and the rest of the team) spent as much time and money on receiving advice as was spent on educating the lawyer in question. Surround yourself with experienced, competent and outcome-focused advisors, or risk seeing deal after deal disintegrate.
6. Lack of transparency. Don’t kid yourself – if you are planning to sell your business, at some point in the process before deal completion every skeleton and red flag in your business will be unveiled (either voluntarily or otherwise). Business owners who attempt to shield negative aspects in the hope that they won’t see the light of day are potentially guilty not only of misleading and deceptive conduct, but stand to spend significantly more on professional fees than they really need to.
7. Impatience. The timeframe for selling a business is roughly as long as a piece of string. Despite best efforts of all involved, the sale process can drag on for months, even years (I have two clients that will finally sell later this year, after more than 30 months on the market). It is particularly difficult to achieve a suitable outcome if you are obstinately pursuing a deadline, but if you are then be aware that sacrifices may have to be made in other areas. As the old saying goes, you can’t have your cake and eat it too!
When planning for your own exit, consider the 7 Deadly Sins and the extent to which are you engaging in any or all of them. A great way to build business value and ensure a satisfactory exit is to avoid these behaviours completely, and in fact to do the polar opposite!