Entrepreneurs spend their entire career thinking like an owner. They don’t need to pay any attention to the value of their business. They may have a vague notion of its value based on anecdotal industry revenue or profit multiples that they heard bandied about at an industry conference they went to years ago in Orlando. But, at the end of the day, during the operating years, what is important to an entrepreneur is the bottom line: how much cash can I take home and/or invest in the business for future profitability?
Then, when they are ready to exit, they flip a switch and start to think like a seller. They ask: how much my business is worth? Or more precisely, how much cash can I get out of selling the business?
That is when they come to us. They are ready to sell. They remember those multiples they heard, and they ask us to sell their business, with those multiples in mind. Typically, our first job is to advise the client on how to price the company. We look at ACTUAL market comps based on ACTUAL transactions. We look at the market value of their hard assets. And we analyze the business cash flows, growth prospects and business risk — from the point of view of a BUYER.
But, how is a buyer’s perspective different? Thinking like a buyer means considering what their risks are if they buy your company, what their synergistic opportunities are, and what their investment alternatives are.
An industry buyer may have synergies with the company they are targeting, and they may be willing to pay more than the asking price. We recently helped a building services company sell to an industry strategic buyer at an incredible market multiple. On the other hand, a buyer may be scared about client retention when the seller leaves. A dentist selling her practice may think she is selling a business with $2 million in revenue. But, dental practice buyers know that up to 20% or more dental patients leave upon a practice transition. So, from their perspective, they are buying a business with $1.6 million in revenue or even less. (Source: “Retaining Patients Following a Dental Practice Sale”; DentalTown; Adams, Bill DDS) Or, the industry buyer may believe that they can duplicate the target company (or whatever part of it they are interested in) and get a better return on investment.
Basically, buyers are concerned not just with revenue and profitability, but also about risk. There are many, many sources of risk. Client retention is only one example. Business owners tend to downplay risk. They downplay risk to themselves, and inevitably to business brokers, buyers and lenders. And since most buyers enter a business with substantial debt financing, their ability to withstand risk and volatility is usually less than that of the seller. Rather than downplay business risk, an owner is far better off facing facts or setting to work on reducing it.
As business brokers, we ask seller clients to not only think like owners and sellers, but also to start thinking like a buyer!
For more information on thinking like a buyer when planning a business sale or when engaging in a sale process, contact Roy Martinez.