Selling your business? It isn’t like selling a white Toyota
It’s a tale as old as time itself. Seller lists business for sale. Prospective buyer makes a move. Much excitement ensues on both sides. Eventually, everyone meets around a table to negotiate. And then… nothing.
The deal falls flat and both parties walk away disappointed.
This frustrates buyers and sellers in equal measure, and it really begs the question: in a world where there are many great businesses worth selling, and many would be owners keen to buy, why are these deals just not happening?
What makes it so difficult to achieve a meeting of the minds and a signature on a term sheet?
We all like to think that our business, our situation and our deal are the exception to the rule. And with the right preparation, there is a possibility that you might be one of the lucky few who manage to get the deal done. But being prepared starts with admitting that yes, there is a high probability that your deal will fall through (and if it does, that’s OK – you’ll be in excellent company). If you inform yourself well beforehand and know what the potholes in the road to success are, you might still be able to avoid them.
First, imagine a car. Not a white Toyota.
Let’s forget that we’re talking about mergers and acquisitions for a moment.
Instead, imagine that you are the owner of a beautiful classic car. You can imagine any classic car that you like – if it helps to kickstart your thinking, the writers of this article have a particular affinity for a convertible Triumph Spitfire or 1960s Alfa Romeo, in both cases in red.
Why a classic car, you ask? Because like businesses, the market for classics is somewhat opaque and has vast levels of information asymmetry. The seller knows far more about the car than the prospective buyer does. Each car has unique characteristics, with a story created over decades. That sounds like your business, doesn’t it?
This certainly isn’t a white Toyota on your local auto classifieds where your phone will start ringing soon after posting the advert. A classic car, like a business, isn’t straightforward to sell.
A 1960s red-and-chrome piece of motoring history is a complicated thing, with every “perfect” Sunday drive with the top down accompanied by a myriad of shaky starts, alarming engine noises and mysterious oil leaks. Fortunately, as the owner of this particular car, you have become quite accustomed to its peculiarities and quirks. You may know that the oil gauge is deceptive, for instance, or that the clutch needs to be coaxed a certain way to reach the reverse gear. When selling this car, you need to convince a buyer to trust those quirks without knocking your price down for them.
Let’s talk about risk, baby.
A buyer approaches you with an interest in your car. But much to your surprise and dismay, the offer that you receive is much lower than what you think is fair. You may even feel insulted that the prospective buyer would offer you such a low price. Why can they not recognise that what you are selling is worth much more?
Didn’t they approach you in the first place?!?
Despite the oil leaks and sputters, you know that your car has never let you down. Of course, you also know just how to work it. A buyer who has no history with the car may need a bit more convincing, even if it caught their eye when you drove past or when they were browsing the classifieds.
There is no such thing as a business without risk. You know what the particular risks in your business are – perhaps an innovative competitor in your field, or a customer base that doesn’t respond well to economic pressure. You have been navigating these risks for as long as you’ve been in business, and you know your way around them.
By listing your business for sale, you are saying to buyers: here is my business. It offers these risks and these rewards. In my experience, the rewards outweigh the risks. A buyer, viewing your business objectively and with no experience in running it, may disagree with you. What you view as a minor risk that can be easily mitigated may be too much for your buyer’s appetite. They may therefore choose to cushion themselves from some of this risk by putting in a lower offer.
A deal for a private company is all about the balance of risk between buyer and seller. The first way to reduce risk in a transaction is to put less capital at risk by paying as little as possible for the asset. This creates an immediate conflict of interest for buyers and sellers and that’s before we bring human emotion into it.
Emotion is what makes us human. Goodness knows that it also makes deals even more difficult than would otherwise be the case.
Did you really get lowballed? Or are you being sentimental?
The challenge for founders is no different to the challenge for classic car owners: the need to distance yourself from sentimentality when it comes to selling. Classic cars are much more than just a mode of transportation, in the same way that the business that you grew from scratch is so much more than a way to make an income. Always be aware that you may be viewing your business through the rose-tinted glasses of sentiment.
The only way to take emotion out of the analysis is to get an objective valuation for the business. This requires an independent viewpoint based on market-accepted methodologies. Like the valuation of a classic car, an understanding of the market conditions is just as important as the theoretical numbers on a spreadsheet.
In the same way that you would take that classic car to a leading specialist for services and major maintenance, you deserve a proper business valuation process to help you understand what your business is worth and what a genuinely fair offer looks like. DM
At bizval, we are specialists in providing independent business valuations to founders and entrepreneurs. Our proprietary methodology has been built based on decades of combined experience in the market, using investment banking techniques that are normally priced way out of reach of small and medium enterprises.
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