Think of a number
Whatever your reason for selling your business, getting the right advice is essential. Some advice though can be very unreliable, perhaps none more so than on the issue of when to sell and valuation. Delay and the risk of under-selling is a very real one for business owners. Seller beware is perhaps an appropriate maxim in these circumstances rather than the more familiar ‘Buyer beware’
There are many reasons why owners want to sell their businesses but perhaps the most common, certainly in our experience are – the business has reached a plateau and to restart the business growth-cycle requires significant investment of time and money; the owner(s) want to pursue other opportunities; the business has become all-consuming for the owners and the entrepreneurial flame of growing a business has been extinguished by a sea of red-tape and regulation. These reasons are cited on a daily basis by our clients, reasons which can become frustrations and have the potential to impact negatively on a business if not acted upon.
Business owners invariably establish businesses closely related to their previous experience, decision-making is almost instinctive in its infancy and as the business matures decisions are taken with the reassurance of knowledge gained and applied over many years. Despite this capability to make the right decisions for their business on a day-to-day basis, many of our clients admit to struggling with the decision to sell and the timing of an exit. This is, in part, due to the lack of reliable information on the subject, added to which, most owners will sell a business just once in the course of their working lives; this single transaction is their once-in-a-lifetime opportunity to release the value locked-up in a business they have devoted many years to building.
Unsurprisingly then, business owners usually conclude that professional advice is needed to achieve their aspirations. It is here that the choice of adviser can have a profound impact on the decision to sell and when. The first step for many owners is to pose the question – what is my business worth? The answer to this question will be used to determine whether a sale of the business makes financial sense; nothing at all wrong with this, provided of course, that the valuation truly reflects the worth of the business.
Almost certainly, this question will be answered by an adviser relating value principally to the previous performance of a business using a return on investment (ROI) approach. This method of valuation reduces it to no more than a financial matter and produces a value based on how many years a buyer would take to recoup their investment if divided by historical [adjusted] profits – typically between 5 and 7 years for privately owned smaller and medium sized businesses. We know at BCMS that this valuation model has significant shortcomings, it fails to take account of the unique nature of the business, its clients, the potential for growth, its market position and many other likely benefits – crucially, any one or more of these benefits will motivate the right buyer. Experience tells us that buyer motives vary widely and have a significant impact on appetite for a business and crucially, the price a buyer is willing to pay – on average, strategic buyer’s outbid ROI buyers by 250% for our client companies.
The BCMS position is clear – matching the right buyer with the right seller is critical to a maximised sale price. It is not possible to accurately value a business prior to marketing it for sale simply because the identity and motives of the buyer are unknown. ROI valuations as a benchmark probably indicate a worse case scenario or best case if no active marketing of the business is undertaken.
