Talking to business brokers and mergers and acquisitions experts there are some key reasons that businesses don’t sell for as much as they could or don’t sell at all. These are fantastic lessons in how to build a valuable business.
Top of the list of reasons businesses don’t sell is unreasonable expectation of how much the business is worth. Business brokers may be guilty of inflating prices to get a listing, but business owners sometimes expect their business to be worth more than it is too. After all, they’ve often worked incredibly hard for a long time to build something from nothing. Their sweat equity is valuable to them.
It’s worthwhile considering the value of your business annually. But how do you do that when “a business is worth what someone is prepared to pay for it”? That may be true but you can get a fairly good idea by bracketing. What’s the lowest price you might get – that will be the value of the balance sheet and the cashflow. The highest price is harder to calculate but a bit of research in your industry will offer insights into profit multiples that are achievable to the right buyer. The bottom line is that you’re far more likely to sell at the lower end of the range anyway, so work on building assets and cashflow and you won’t go far wrong. If you can also work on building a unique value proposition, then you’ll add even more value. The great part about this is it makes the business more profitable, less stressful and more enjoyable to run. It’s a win: win.
The second most common reason for failing to realise the value of a business is having a number of family members in key positions. Again this is not unusual and makes a lot of sense while running a business. These are people the owner can trust to have the best interests of the company at heart. Unfortunately, it makes for a difficult transfer of power and management and should be considered carefully in developing an exit plan.
Related to this, businesses fail to sell when the owner is the business and so it can’t effectively operate without them. Again this is not uncommon. When a business owner has worked hard to build a business, it seems inevitable. The solution is to make the transition from owner-operator to owner, delegating all of the day to day running of the business to other people. The owner is then free to act more strategically in the business. This often raises a few fears in the owners mind – what if my customers leave because they like engaging with me, what if my team think I’m not doing anything, what if an employee messes up, etc., etc. These are all valid points that can be addressed in an exit strategy.
Another reason given by M&A experts for low valuations is that the owner is ageing and has slowed down resulting in falling revenues and profits. Fortunately, executing an exit strategy based on delegating yourself out of the business also effectively deals with this issue.
Effectively avoiding these issues takes a bit of time. It can take a few years to get these elements in place. But, to reiterate, doing so makes good business sense because it makes the business easier to run, more profitable and less stressful.
We’ll look at some of the other reasons in Part 2, but for now, what do you need to start doing to get started.
Remember success only happens at the finish line.
What’s your success strategy?