One thing I see from time to time when a client decides to sell their business is a surprised look when I tell them that sadly no, you won’t be selling their business for mega-bucks.
One thing I see from time to time when a client decides to sell their business is a surprised look when I tell them that sadly no, you won’t be selling their business for mega-bucks. People sometimes have pie in the sky assumptions about what their ‘baby’ is worth and that often blinds them from the reality that there can be things in their business that are real road blocks to getting top dollar.
Three of those road blocks include the key person problem, a lack of system documentation and poor preparation for the sale.
Road block number one is the key person problem – many NZ businesses are just the owner(s) plus a couple of staff. Take the owners out and the business doesn’t exist. Why? Well the owners are the glue. They are doing the sales, they have the client relationships, they have the systems knowledge, they are the ones who know the recipe for how to make the widgets.
That skill and knowledge can’t be replaced overnight.
Relationships alone can take years to transition (even then there’s no guarantees) and who wants to buy into a business only to have sales drop off because all the relationships were with the vendor. There are ways to mitigate this problem but they take time and planning.
Reason number two is lack of systems – this is a huge weakness in (most) NZ businesses – and not just small ones. It seems to be anathema to write down how stuff should be done in the business. As an ex-auditor it was really annoying as it meant I generally had to do it. And this is just putting some processes down on paper – let alone documenting anything about say what could go wrong and how those risks have been mitigated. A firm that has solid process documentation will often have a high-quality company culture and clear direction.
A buyer of the business who could get their hands on some good documentation would come away with a feeling that the business is well controlled with all staff clear on their roles and responsibilities. That makes you offer more. If you don’t know how everything happens then a couple of scribbled notes from meetings with the current owner as part of the due diligence stage won’t make up for it. You’ll simply offer less.
Reason number three is due to insufficient time going into grooming the business. Unfortunately too many businesses are sold with inadequate preparation. That means getting unnecessary assets out of the business, tidying up personal things in the accounts, moving on under-performing staff, sorting out leases and contracts, and doing the best you can to get the business ready for a new owner.
Sadly what often happens though is owners simply stay too long in the business and then end up selling in a hurry when they get sick, or just sick and tired of doing the day to day. This reduces the sales price as it limits your sales options – i.e. an outright sale with some time pressure becomes the order of the day rather than any graduated process (which can often earn vendors more).
Unfortunately, there is no guarantee your business even sells. Some businesses unfortunately have to shut the doors as they simply haven’t been able to attract any bidders due to poor preparation and a compressed time-frame. As more and more businesses start to hit the market with baby boomers starting to retire en masse it will be important to do all you can to stand out if you want to get a premium price.
If you want top dollar then you better make your business attractive. You’re not selling a house. The value proposition of a house is easily understood. You pay two legs and your first born, and then you get a roof and a bit of shelter and warmth (usually).
Most businesses are harder to understand but the same principles apply in that you get the best price when you are attractive to the most people. If I paint the walls in my house purple that will put some people off, and I won’t get top dollar. If my records are in poor shape, or I haven’t bothered to renegotiate that building lease to give the new buyer some certainty, that limits the buyer pool.
Let’s say we have two plumbing businesses for sale. Business 1 has documented systems and a manager already in the business. Business 2 has an owner that does it all and is running around doing 60 hours weeks.
Business 1 is an investment as I don’t need to know the industry and the business runs whether I’m involved or not. Business 2 equates to buying a job (unless I add a manager to the payroll).
Which one will I plump for? The only way I buy Business 2 is if I get it for a steal – and that’s my point. Even then it might not be worth the risk. Business 2 has narrowed the market for potential buyers considerably as you’d really only look at it if you already knew a thing or two about plumbing.
The moral of the story is please don’t just think you can cruise into a sale and get top dollar. Get some expert advice so you can prepare a proper succession plan that gradually readies the business for sale. You only get one shot at selling and for many people that can make a huge difference in how comfortable they are in retirement. Give yourself some runway to get your house in order and you’ll be thankful.
Leave it too late (or take the typical she’ll be right approach) and the retirement plan may need to be topped up by a lotto win!