How attractive is your company to an external strategic buyer or to the current management group? How dependent is the company’s current level of success on you? What does the makeup of your customer base look like and is it dangerously tilted towards one or two large clients? Do you have contracts that ensure recurring revenue or do you chase deals, deliver goods/services while continuing to chase deals? Do you document your policies and procedures or are they filed away in your head? These factors and more influence the quality of earnings you enjoy and directly answers this paragraph’s opening question.
Mental Readiness and Selling Your Business
According to two tools we use to understand owner readiness to sell, the majority of business owners are not mentally ready to exit, are not financially positioned to exit on their terms and have not made a commitment to intentionally growing their business such that they actually have a transferrable asset.
54% are not financially positioned to leave their business even if they wanted to
86% of businesses listed for sale either fail to sell or sell at deep discounts to owners’ expectations
76% of owners exhibit a low commitment to growth
All of this is arguably related to clarity around choices, an understanding of the planning process and in some instances the paralysis that accompanies feeling overwhelmed. What this also means for those who are prepared is a competitive advantage when it comes time to exit.
When to Begin Planning
We would argue in favor of “sooner rather than later”. This has nothing to do with committing to sell and everything to do with understanding your choices and the different implications of each choice. There are at least 6 actual paths you might go down, each with its own sets of considerations from tax treatments and fees to control issues and to alignment with your personal goals. Understanding the relationship of these choices to your personal goals is key to heightening your mental and financial readiness. Knowing the path that makes the greatest sense for you and your family will influence business decisions long before anticipating a transition. That’s why today is the best day to get started.
Attractiveness – It’s Not About Dressing up the Pig
There are 18 value drivers to all businesses despite the differences in industries. Some are more pronounced than others but they all play an important role in making your company attractive to a buyer. Where resources are limited and wrong decisions costly, having clarity around the relative value of each driver to your business in your industry is a critical step in ensuring cash flow and predictable profits.
Several of these drivers play directly into the quality of earnings your company throws off. What’s the importance of quality? Aren’t earnings, earnings? No! They are not.
Quality of earnings determines how your earnings are valued in the eyes of a buyer. It directly impacts the valuation of your company. Two companies of equal size in the same industry might very well be valued very differently based on this factor. Think of the multiple of earnings as a proxy for how confident a buyer is in being able to replicate the performance of the company once they take possession. The less confident one is, the higher the risk, the lower the multiple. It is really about pricing risk.
If you want your earnings to garner a multiple at the higher end of the range for your industry you need to de-risk your company and tighten up the quality of earnings.
If you have questions about the process, we’d be happy to answer them. You can reach us by contacting us with the information below.
Written By: John Foster
John Foster has 30 plus years of distinguished leadership and management experience with multiple companies at various stages of development across several fast-paced industries