You've worked hard to build a successful business and now you are selling and in discussions with a buyer. If you are like many business owners you are proud of what you have accomplished but also recognize how much work it required to build your business. Along the way you've learned tips and tricks that have helped you to be more efficient and effective in your key management role. Perhaps the buyer has suggested that they would like you to consider staying on as a paid executive for the first 1-2 years after the sale has been completed. If you're like many people in this situation, you may be tempted to convey how important you are to the operation of the business because you'd like the buyer to pay you a good salary for your ongoing transition role in the business. Your inclination may be to say something like, "I've been the key person doing R&D and nobody else in the organization is truly ready to replace me, yet. Because I know the ins and outs of the business if you were to replace me it would likely require 1.5-2 staff members." You may not want to say this.
Don't get me wrong - I'm not suggesting that you lie if this is, in fact, the case. However, if you are like many business owners you are also playing some roles in the company that could be delegated, you likely are spending some of your work week devoted to more personal projects, and there may actually be people with strong experience out there who could be hired who are more efficient and effective than you are. The problem with selling how important you are to the operation of the business is that a business buyer may have second thoughts about whether they can successfully operate the business without you, whether they will they be able to find an eventual replacement for you, and if they will need to significantly increase the budget for replacement staff which increases their projected expenses and thus, lowers profitability and value.
Maybe exaggerating your importance helps you negotiate a higher pay rate for your 1-2 year transition, but what does this mean for the valuation of your business? If the market rate for your position is $150,000, but a buyer believes that they will have to hire two $100,000 employees to replace you, that means they will have $50,000+ in greater expenses and lower profits. That additional $50,000 profit if included in valuation calculations may mean a difference in value of $150,000 - $300,000 in business value.
Don't get me wrong - I'm not suggesting that you lie if this is, in fact, the case. However, if you are like many business owners you are also playing some roles in the company that could be delegated, you likely are spending some of your work week devoted to more personal projects, and there may actually be people with strong experience out there who could be hired who are more efficient and effective than you are. The problem with selling how important you are to the operation of the business is that a business buyer may have second thoughts about whether they can successfully operate the business without you, whether they will they be able to find an eventual replacement for you, and if they will need to significantly increase the budget for replacement staff which increases their projected expenses and thus, lowers profitability and value.
Maybe exaggerating your importance helps you negotiate a higher pay rate for your 1-2 year transition, but what does this mean for the valuation of your business? If the market rate for your position is $150,000, but a buyer believes that they will have to hire two $100,000 employees to replace you, that means they will have $50,000+ in greater expenses and lower profits. That additional $50,000 profit if included in valuation calculations may mean a difference in value of $150,000 - $300,000 in business value.
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