The Art of Selling A Business
A few comments about this article . . .
1. The author’s first step is to “Get real about what your business is worth.” I agree that a business owner should develop an understanding of what their business is likely worth, but the tip of “Buy lunch for a mergers and acquisitions professional or business broker and ask them for a guesstimate of what a business like yours is fetching these days” is NOT good advice. Here’s why: there are many issues that could have a significant impact on your business’ value. A casual conversation over lunch with a M&A advisor or business broker won’t provide a very accurate estimate of value, and may result in a “guesstimate” that is dramatically higher or lower than what your business is realistically worth. Instead I would suggest hiring the business broker or M&A advisor to do a thorough review and valuation of your business. This review should be far more than simply looking at the past two year’s financials and making some quick calculations and applying a multiplier to it. The business broker or M&A advisor should develop a strong understanding of your business, including, amongst other things: the business model; risk factors; differentiators between you and your competitors; business strengths; the overall competitive environment; opportunities for growth; historic and probable future growth; trend analysis; ratio analysis; diversification of revenue by product and service; intellectual property; the quality, breadth, depth, and retention of staff; and threats to the business’ long-term success. Without knowing these types of things, an estimate of value will be little more than a guess.
2. In the author’s step 5, which is “know when you lose your leverage” he says to “Expect the offer price to drop by 10-20 percent after you sign the LOI and be pleasantly surprised if it doesn’t.” While I don’t disagree with the author’s premise, did you know that Codiligent’s business seller clients, on average, from 2003 - 2013 have experienced less than a 1% price renegotiation between LOI and closing? I believe that one of the reasons my firm is so successful in maintaining prices is that we approach business sales differently than most business brokers and intermediaries. Codiligent provides a far more comprehensive confidential information package which includes most of the material disclosures necessary for a buyer to make an informed buying decision BEFORE a LOI is signed. That doesn’t mean that we will necessarily give out all confidential information in the package prior to due diligence. For example, we may promote that a business has some excellent clients, but we don’t necessarily have to reveal their names. Instead of naming the company’s top client, XYZ Company, we instead may say something like “The top client, which accounts for 8% of this business’ overall sales, is a privately-held, $200 million+ in revenue business in the food and beverage industry located in the western US.”
In any event, the other points in the BNET article are good ones, and you may enjoy the art that accompanies them.