Finding a buyer – at the right price – is more difficult than you may think, writes CRAIG ALEXANDER RATTRAY
Over the last few months, I have spoken to many business owners who have had enough. Problems with finding employees, materials and cash; too much time for too little return; and family disagreements, are some of the reasons. Lockdown has exacerbated many of these. I am regularly hearing “I want out”; “I’m tired”, “let’s find a buyer”; and “surely there will be many people interested”.
In many cases, there is initial disappointment when the owner realises that their business is not in the right “shape” to sell. To be more accurate, it is not in the right shape to sell for the price they want.
The reasons vary and are often plentiful. There is poor financial information, no protected market position or unique element to the business, and the owner is heavily involved in everything.
Nobody likes to be told that they have an ugly baby, but for many parents of a business, that is indeed the case.
I have previously written about the eight key drivers of business value, strategic buyers and things that can be done to improve the exit value and likelihood of sale. However, they are not overnight fixes and require thought, implementation and delivery.
Most business owners are unlikely to sell the business themselves and generally bring in external expertise to assist in the process. Accountants and corporate finance specialists have been doing it for many years, and latterly the emergence of the “business broker” has changed the landscape.
In my experience this should come with a few warnings.
Not all business brokers are the same. Not all business brokers are good at selling businesses. Not many business brokers sell the business for the price they suggested at the start of the process.
There are some business brokers that operate on a volume basis and list many businesses, following the payment of an initial fee, an ongoing retainer and the hope that they sell enough to make a decent return. Indeed, some try to make a living from these initial fees and retainers alone because they do not sell many businesses.
Evidence appears to support this and show that success is hard to find.
One of the large brokers shows in its annual report that it makes 60% of revenue from retainers and sell fewer than 10% of businesses that they list.
The International Business Brokers Association seem to back this up by stating that up to 90% of businesses listed for sale never sell.
Inflated and unrealistic price expectations are often given at the start of the process in an effort to “sign” the client.
This makes matters even more difficult as the failure to price the business properly sets an expectation with the business owner, and this number is “locked-in”, with the result that the owner will not sell for less.
In many cases the positives of the businesses are highlighted, but the negatives and failure to hit previous revenue and profit targets are ignored. The usual list and justification of “add-backs” to profit and non-recurring costs typically show a profit position that bears no resemblance to the actual profitability achieved.
Lots of window dressing and setting up for failure.
Are there alternatives?
Prepare for exit well in advance of thinking about sale.
Have a business that runs well without you.
Set realistic price expectations.
Think about a potential strategic buyer and work at making your business a good fit for acquisition by that party.
There are other ways to take control and these usually involve sale to management, and with this type of sale there are some value enhancing and tax driven ways of increasing the net return to the business owner.
The key is to get your business into the right shape for sale, and then perhaps you may be able to wake up one day and be able to sell your business.
Craig Alexander Rattray’s column on issues affecting owner managers appears on alternate Mondays