Looking through a shirt shops’ clearance bin recently, it struck me that what I held in my hands was a well-crafted, beautifully-designed, stylish item made from the finest materials. Yet its price had been slashed to almost one-third of its original RRP.
This then caused me to consider why some companies are too finding themselves in the bargain bin when it comes to funding a buyer, despite being – for all intents and purposes – well prepared for sale. M&A reports earlier in the year suggested that a large number of businesses that logically should fetch three times earnings valuations had in fact transacted for half (or less) that amount. My impression was that in most circumstances the vendor had taken the time to de-risk the business and set it up for continued growth, yet at the coalface of the sale process it failed to yield an “at-market” outcome.
I see this in my own dealings from time to time, when a business is put through a comprehensive appraisal process yet fails to replicate the determined value when it goes on the market. With the benefit of hindsight, we look back and wonder “was it overpriced?”. In many cases the answer is a clear “no”: the assumptions were sound, the multiple applied in line with market expectations, the buyer profiling accurate.
So why, then, do an increasing number find their expectations so far out of line with the final outcome? Considering the shirt anecdote, is the business “sooooo last season”? Is it not in line with current trends? Is it missing some piece of what is now considered critical functionality (try buying a brand new car these days without BlueTooth connectivity!) Is it not the “new black”?
The basic answer to these questions is “yes”. This might sound a little bit of a stretch, but insofar as a business has limited appeal to potential buyers at a deeper, more emotional level, it is going to struggle in an increasingly competitive marketplace for business sales. The logical, rational assessment of an opportunity (i.e. its financial performance, risk profile, growth potential, identified synergies) is simply the first hurdle in the process of ownership transition.
Okay, I admit that there is little in the way of empirical evidence to substantiate this conclusions I have drawn, however based on the day-to-day, the concept of “appeal” does appear to be the missing link between objective valuation and market reality. The real problem is coming up with an objective method of identifying, measuring and quantifying a company’s level of appeal beyond the basic supply and demand equation, for more accurate value appraisal.
So whilst I have yet to formulate and commercialise the necessary algorithm to enable this, “appeal” will certainly be top of mind in future conversations and engagements in order to maximise the outcome. A useful approach for business owners in the meantime would be to take the time to step back and consider the following question as objectively as possible:
“Why would someone else want to buy my business?”
If that cannot be answered to any level of satisfaction, perhaps it is one of the better starting points for the exit planning discussion.