Mar 17, 2022
Is your business worth what you think it is?
We have all been there—you see a nice sports car, fire engine red, and think to yourself, “Wow, what a beautiful car!” What makes it a nice car? Is it only the way it looks, or does believing that there is a ton of horsepower under the hood also make it desirable?
But what if you lifted the hood and that car had an old, weak engine inside? Is the car still as desirable? Maybe not.
That could be what a potential buyer thinks about your business! It could be free of debt and generate great cash flow, but a prospective buyer is going to look beyond the numbers. Sure, they will certainly look at how the business performed while you were the owner, but what they are most concerned with is what they’ll be receiving after the transaction closes. What is transferred to them? A buyer will not purchase your business based on past performance alone—they will buy your business because of what they will be receiving after the deal closes!
Here are a few things to consider when gauging the transferability of your business:
A big red flag for a buyer is if the business is too dependent on its owner. Many times, the owner runs the business, brings in most of the new revenue, maintains key relationships, among other things. Ask yourself:
- If the business is too dependent on the owner, how will that impact business operations once he or she separates from service?
- If the owner is not around, how will that impact business development or key business relationships?
- If the business cannot run without the owner, what exactly is a buyer receiving?
In a buyer’s eyes, another potential issue is the absence of key managers to succeed the owner. Having a solid management team around the owner pre-transaction can be a huge plus to a buyer. The absence of a solid management team could result in a rough transition as it relates to operations, employee morale, and relationships with business partners. Keeping a high-quality management team around the business owner can help drive business value, ensure a smooth transition and keep business running smoothly after the sale.
The sales numbers in your business may look great, but if too much is derived from one customer, that presents a risk to the buyer. If that customer leaves to go to a competitor, the buyer would be in big trouble from a revenue standpoint. If possible, it is ideal to have a diverse customer base where each customer does not account for too much of company sales. If this is not possible, putting some sort of customer contract structure in place can help mitigate some of that risk for the buyer.
Owner's personal plan for exit
According to the "2013 State of Owner Readiness Survey", 75% of business owners regretted selling their businesses within one year post-close. And only 4% of business owner respondents mentioned having a formal, “life after business” plan in place. Not only is this type of plan important for the owner, but it can also be important for a buyer as it can both increase the chance that the owner will live a full, meaningful life post-transaction—and can reduce the risk that the owner will back out of the deal as it progresses.
Many people use the following phrase to talk about exit planning: “the first thing you do when you start a business is think about how you’re going to get out.” Of course, there are plenty of things to do when starting and running a business, but exit planning should always be top of mind for business owners. Working on the above items will help minimize risk and improve the value of your business today and tomorrow.
ABOUT THE AUTHOR
BDF LLC is a private wealth management firm. We provide personalized investment management and financial planning. We manage approximately $5.9 billion in assets for business owners, women, individuals and families, and institutions.
We also have Practice Groups that specialize in the unique needs of:
- Financial Professionals
- Insurance Brokers and Agency Owners
This information is for educational purposes and is not intended to provide, and should not be relied upon for, accounting, legal, tax, insurance, or investment advice. This does not constitute an offer to provide any services, nor a solicitation to purchase securities. The contents are not intended to be advice tailored to any particular person or situation. We believe the information provided is accurate and reliable, but do not warrant it as to completeness or accuracy. This information may include opinions or forecasts, including investment strategies and economic and market conditions; however, there is no guarantee that such opinions or forecasts will prove to be correct, and they also may change without notice. We encourage you to speak with a qualified professional regarding your scenario and the then-current applicable laws and rules.
Different types of investments involve degrees of risk. Future performance of any investment or wealth management strategy, including those recommended by us, may not be profitable, suitable, or prove successful. Past performance is not indicative of future results. One cannot invest directly in an index or benchmark, and those do not reflect the deduction of various fees which would diminish results. Any index or benchmark performance figures are for comparison purposes only, and client account holdings will not directly correspond to any such data.
Our clients must, in writing, advise us of personal, financial, or investment objective changes and any restrictions desired on our services so that we may re-evaluate any previous recommendations and adjust our advisory services as needed. For current clients, please advise us immediately if you are not receiving monthly account statements from your custodian. We encourage you to compare your custodial statements to any information we provide to you.