Co-founder and CEO Graham Stephen regularly shares his insights gleaned from discussions with clients and real-world challenges faced by founders and business owners.
“It’s time. We need to sell. We are ready.”
That’s usually the starting point, isn’t it? When that conversation takes place among founders who in many cases have dedicated their lives to building a business, then the next call is usually to an accountant, business broker or perhaps an uncle who once sold a business.
In reality, this is only the start of a process that doesn’t always work out the way people hope. Not all businesses can be sold. Even the ones that can be sold won’t necessarily attract the right offer. The private company market is opaque and complex, unlike publicly listed equities where you enter a bid or offer on a trading system and someone instantly takes the other side of the trade.
Our core business at bizval isn’t to take on disposal or acquisition mandates. We generally work with partners on those deals, as we like to focus on our core operations of valuing businesses and helping owners figure out where the gaps might be. Of course, like every business, we also make exceptions from time to time.
Not only does this allow us to help our clients, but it gives us ongoing learning opportunities when we test the market and evaluate the offers that come in.
The “right” deal vs. the “right now” deal
When we value a business at bizval, we give a valuation range based on what a financial investor would likely be willing to pay. This doesn’t mean that (1) a financial investor will be found or that (2) a financial investor willing to transact won’t make a lowball offer anyway.
Welcome to the jungle. If it was easy, everyone would sell their businesses and retire to the Caribbean.
In a perfect world, a mix of financial and strategic investors will put in non-binding offers. The numbers will ideally be in an acceptable range, allowing the sellers to evaluate the other terms of the transaction. And make no mistake – those terms are often the reason why deals fail or succeed. This is a complex process, rarely leading to the “right” deal and often resulting in a “right now” option that is a compromise for the parties involved.
This is because in practice, there may only be a couple of offers that come in. In a scenario where only a few buyers have emerged, the negotiating power doesn’t necessarily sit with the seller. Whether the offers are from financial or strategic investors, the likelihood is that negotiations will focus on where the true risks of the deal lie. These risks range from the margin of safety in the valuation (i.e. an offer price below the indicative valuation – something buyers love!) through to mechanisms that guarantee a full exit (usually protection for the sellers but often useful for buyers as well).
That’s before we get to the more emotional stuff, like guarantees for ongoing employment of staff who helped the founders build the business. Again, you won’t find any of this in public company deals.
What if it isn’t the right time?
Failure is a funny thing. The definition of failure is a moving target. If the only goal is to sell a business immediately, then failure is easy to manage. It either did or didn’t sell – end of story. If the goal is to sell a business on the right terms, then the process of going to market can be a great success even if it doesn’t result in an offer.
Why? Because learning is a beautiful thing.
Receiving offer letters from real-world investors is the very best way to identify what the market thinks the company is worth and, more importantly, why the market thinks that:
- Is it a succession issue?
- Does it come down to historical vs. future earnings and where that balance lies?
- Is market sentiment shifting in the wrong direction at the moment?
There are many potential reasons.
One of our clients took a “failed” process on the chin and treated it as an opportunity to address some of the market’s concerns. In their case, it meant taking the business off the market and planning to come back in a year or two after focusing on demonstrating their ability to hit the numbers that are in their 3-year plan. It also meant pulling the trigger on executing on their succession plan and having the owners take a side-step into a non-executive role over the next 2 years to actually let their succession team run the business on a day-to-day basis.
The starting point for any founder looking to exit a business is to understand the drivers of the valuation and what the key sensitivities are. Our Live valuation gives a wonderful indication of value, with the precision improved as we move through a Concierge and Bootcamp process for those clients who are serious about entering a formal process. Contact us and let’s discuss your needs.