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by Ronald Hertenstein
Copyright 1998
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business opportunities articles index
Business owners seldom sell too soon but
often wait too long. Most businesses are not
sold! They just fade or are given away. Examples
of long established businesses simply closing
their doors are legion. Many others are sold at
less than fair value because of ill health,
divorce, partner disputes, owner burnout or
business slow down. Because of these adverse or
distressful conditions, they do not command
their greatest potential value and are often
simply liquidated.
On the other hand, we all know or have heard
of companies that have sold for fantastic prices
with a substantial amount of cash paid at the
closing table. The million or maybe
multi-million dollar question is why? After much
thought, and over a decade of experience gained
in the sale of several hundred companies, the
answer is both simple and complex.
The major factors threatening the value of a
business are:
· The decision to sell or not to sell a
viable company can be continually postponed. ·
The entrepreneurial nature of most business
owners. · Conventional wisdom as to how and to
whom a company should be sold is generally
inappropriate. · There exists a misunderstanding
of the factors that drive the value of a
company. · The inability of business owners to
position their company so as to obtain its
highest value.
Sell or Not to Sell Perhaps the most
important and most difficult decision a business
owner ever has to make is the decision to sell.
Unfortunately, most business owners agonize over
the many variables involved in selling without
ever making the decision to sell.
The result of the postponement usually is
that the decision is made for them. Poor health,
divorce, slumping sales, creditor demands, poor
employee relations, lack of operating expansion
capital are very often the symptoms of an owner
who should have sold but failed to do so when
the business was right for selling.
Nothing stays the same. Over time a business
changes as does the owner. Eventually the
demands and needs of the business are in
conflict with your perspective and skills.
Something has to give. Will it be your personal
life and health or the business that suffers, or
both? By failing to make the decision to sell
the business owner allows it to be made for him.
Entrepreneurial Nature of Business Owners
Unlike management of larger corporations who can
draw upon many resources for support,
information and operational advice, the
management of the small private companies must
wear all the hats themselves. Competition and
the many financial drains facing smaller
companies mandated that the owner do it himself
whenever possible. The luxury of drawing upon
outside resources is generally restricted to
limited accounting and legal advice.
Most business owners have received
unsolicited inquiries from potential buyers. It
would seem logical therefore that attracting a
buyer would not be that difficult. To the
successful did-it-himselfer, selling the
business doesn't appear to be that difficult,
especially to the owner who has experience in
successfully selling his product or service.
Fortunately, the owner who makes those
assumption is partially correct. Finding buyers
is easy. In fact, everyone "has a buyer." Buyers
hire firms to search for companies, network
actively with lawyers, accountants, bankers, and
others as they search for the right business.
The typically aggressive buyer will look at
scores of companies, make several offers and
still be looking for a company. These buyers
report to us that most sellers are unrealistic,
don't know what their business is worth, often
don't know how much they are making or losing
and that getting adequate information on the
business is difficult.
What really is happening: the businesses are
not prepared for sale, are being exposed to the
wrong buyers and are positioned as less than
attractive opportunities. Selling a business
should not be a do-it-yourself project.
Conventional Wisdom is Generally
Inappropriate The public perception of how and
whom to sell a company comes from several
sources: newspapers, movies, television and
hearsay. Unfortunately, these sources provide
information that is either misleading,
inappropriate or wrong, when applied to mid-size
companies. These sources deal with public
company happenings not those of private
companies. There is a world of difference
between the two. No one person owns a public
company, shareholders do. Public company
accounting methods are focused on maximizing
profits in order to satisfy shareholders'
demands and allowing management to maintain
their jobs. Private company accounting methods
focus on minimizing profits for the reduction of
taxes.
Private company owners need not be concerned
with hostile takeovers, junk bonds, P/E ratios
or loss of a job because the company did not
show a sizable profit in recent quarters. Most
observers would agree that a major difference in
protocol and culture exists between private and
public companies. Because there is no public
information available regarding the sales of
private companies, many business owners and
their advisors will apply public company
protocol when attempting the sale of a private
company. This methodology could generate the
wrong buyer which creates unproductive
negotiations, breach of confidentiality with
employees and customers, and result in an asset
value only sale. This method could also create
the wrong price that is artificially high then
loses the right buyer, keeps the business on the
market too long creating a shop worn viewpoint,
and attracts too much exposure of sale without
tangible results.
What Drives the Company's Value Surprisingly,
financial results are not the only factor in
driving a company's value. The person or firm
that recognizes the highest value is paid for
entities that can demonstrate historical and
future performance. Any buyer will be looking
for a payback on their investment and this can
only come from the perception of future
profitability that is most likely to happen.
Unfortunately, this step does not usually
receive the attention required. The business
owner or his advisors, although immersed in the
business climate, are not familiar with the
marketplace forces and the various types and
categories of buyers that find this crucial.
Opportunity is an obvious factor that must be
on everyone's list. Everyone seems to equate
opportunity with potential but it is not true in
the derivation of business value. Buyers will
pay for opportunity but will not pay anything
for potential. Buyers will not pay for what they
will do with the business. They will pay for
what opportunity has been proven to be and
proven to continue.
Value is driven substantially by earnings.
Since most private owners minimize earnings for
taxation, the true value of the company lies
within the recasted earnings into a meaningful
cash flow for a potential buyer. In addition,
the recast will need to be a demonstration of
the future cash flow capabilities of the
business.
Positioning the Company Positioning is
similar to attitude in that proper positioning
will produce positive results just as a positive
attitude produces a richer and fuller life.
Because it is virtually impossible to view
oneself truly objectively, positioning should be
left to a professional. To properly position a
company for acquisition steps must be taken to
objectively determine the company's strengths
and weaknesses. Identify the firm's uniqueness
and hidden values. Understand the subjective
environment that surrounds the business.
Research and gather data and information from
outside sources to substantiate and verify
opportunity. Quantify subjective data so as to
give credibility to a projected future value.
Weave the gathered information into a
comprehensive profile of the company and the
opportunity the firm represents.
A properly positioned firm sells for a
premium price to a person or company able to
enhance the operation. The owner receives an
optimum price. The buyer acquires an exciting
opportunity. Customers, employees and vendors
continue their beneficial relationship with the
firm.
Conclusion
Obtaining the best price for a business
begins with the timely decision to sell. Doing
it yourself should be limited to the decision to
sell only. Thereafter, professional assistance
should be obtained in order to maximize value,
maintain confidentiality, and avoid costly
mistakes.
Major corporations engage "pros" to enhance
the value of their products in the marketplace.
Professional athletes have their promoters,
actors their agents, public companies their
investment bankers. The unfortunate fact that
most small to mid-size companies are sold for
much less than they should indicates that the
owners of these companies need professional
assistance in their sales process.
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