As we talk to business owners about exit planning for their businesses, there are five myths we commonly hear. These myths should be addressed and dispelled, because they can lead to problems during the exit of the business – and, many of these problems are avoidable if they are addressed ahead of time.
CPAs, valuation experts, investment bankers, intermediaries and other advisors can develop very good valuations and pricing strategies for a business. However, at the end of the day, it takes a willing seller and a willing buyer (and, often, a willing banker or investor!) to establish the real market value of a business. Owners who rely on casual comments from strategic buyers a number of years ago, or owners who rely on valuations performed for other reasons (such as estate planning), often will find that this information is not reliable.
At Abraxas, we understand that a seller needs to understand the potential market value of his or her business. To arrive at a range for the sales price, we help business owners identify the variables that would impact value for their particular business. The most important variable is, “who is the targeted buyer?” (e.g. individual, strategic buyers, private equity groups, employees,). And, the spread in purchase prices can be very different depending on the industries, financing requirements, and the general state of the M&A market.
Over the years, businesses develop many issues – some seriously impeding the business, some just big nuisances during the sales process. Such issues might include lack of external financial reviews, weak internal control processes, poorly documented employment practices, potential environmental issues, or unresolved litigation. It is very important that all significant issues get addressed before the sale of a business – not during the sale of a business. The seller does not want issues that could have been addressed before marketing the business to become discussion points during deal negotiations. All risks that the seller has lived with and is comfortable with become big issues during the deal.
There are many excellent advisors (CPA’s, wealth managers, estate planners, attorneys) who give timely and appropriate advice to their clients concerning business exit planning. However, two issues can arise. Often the clients don’t want to take the advice (or pay to get the advice). Or, the advisors miss the boat, or aren’t what the business owner thinks they are. For example, there are CPA’s who are experts in tax compliance – getting this year’s tax return prepared – but not in advising their clients on tax strategies. They may not address the corporate structure issues with their clients at all!
A common mistake that owners make is to try to sell their business when it has reached its peak (or what they want for the business), and not to take into account market activity (e.g. their business segment is experiencing heavy M&A activity), industry shifts, their commitment level to the business, or many of the other factors that can affect a business value. A good rule of thumb is to sell the business as it is increasing its revenues and cash flow. This is when it is the most attractive to others! When it has reached its peak, it is too late.
Selling a business not only requires unique skills, but can take a great deal of time and attention away from the business. The most important time to keep a business growing is during its sale. This is very tough to do when the owner is also focused on driving the sale of the business to completion.
In addition, many entrepreneurs lack the expertise and independent perspective to sell their business. A common reason that deals get killed is the seller’s lack of understanding of the process or “chemistry issues” with the buyers. These issues are exacerbated when the seller is too close to driving the process. A qualified intermediary will nearly always more than earn their fee – not only maximizing value and terms, but also allowing the owner to stay focused on running the business.
At Abraxas, we understand why these myths must be avoided. Contact us at email@example.com to learn more about proper planning to increase the rewards of selling a business.