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. In Part 1 we looked at the top five. Here we complete the list.
The business’s industry is diminishing or threatened by globalisation. To some extent, this is about timing; exiting when the market is high before it goes into decline or comes under threat from cheap imports from developing nations or disruptive new entrants. However, if the decline is under way, there is a choice – take the hit or decide to compete for a larger slice of the total market share. Alternatively, diversify into growth areas on the back of the current product offering.
In this scenario, the business is dependent upon one or two customers constituting a large proportion of total business. This can be a high risk factor for a potential acquirer and lead to a lower valuation. Of course, to the right buyer, it might be just what they need. In which case, the seller’s job is to figure out who the right buyer might be and then court them. Other “inverse monopolies” exist that can also limit the value of a business, but these do not make the top ten.
Perks of the Trade
The profits of SMEs are sometimes taken by the owner as various “perks”. Unfortunately, from a business valuation perspective, these reduce the value by lowering EBITDA and are unlikely to be accepted as adjustments, or add backs, to EBITDA for valuation purposes. It takes time to prepare a business for sale and one of the reasons is to have the financial reports clear of such benefits.
Things can get ugly in due diligence. Things are going along nicely, you might even like the acquirer personally, but then the lawyers and accountants get involved. It’s not their fault, they’re just doing their jobs, but every little thing comes under scrutiny as they try to protect their clients from over-paying or buying a lemon. Educated sellers know what to expect and can make sure that skeletons are not hidden – they just don’t exist.
It’s probably to be expected that this would be on the list: one of the reasons for businesses not selling is that sellers don’t listen to (or seek in the first place) the advice of brokers or M&A specialists. Most businesses owners sell a business once. If they’ve never done it before, it’s likely there will be a lot they don’t know. Best to take lots of advice and follow the advice that makes most sense. Beware the advice given with an ulterior motive of course – I refer you back to the previous article where we covered over-valuation.
That completes our list of top ten tips for building a more valuable business based on the top ten reasons that businesses don’t sell, or sell for less than they should.
Which elements are most relevant to you will depend upon which stage your business is in right now. There are things that any business can be doing to increase it’s value and likelihood of a successful transition to new management. Many of them will make the business more profitable, cash-rich, easier and less stressful to run.
Success happens at the finish line.
What counts is how you run the race.
Run it with the finish line in mind.