Common Value Drivers - Blog 1 of Many
Over the next several months I plan to methodically address common, but mission critical "Value Drivers" that every Seller (and every Buyer) should be assessing with respect to a Company's enterprise value. Too often, we look at the financial numbers alone and leap straight to a napkin based, rule of thumb valuation. While rule of thumb numbers can be extremely helpful for some statistical data points, the truth of the matter is that for any transaction, the value is in the eye of the beholder. No doubt, ultimately the marketplace drives the value, but no two companies are alike... I hate to say it, but if you are doing it right, it is more complicated than that.
No surprises here, but there is often a value gap between a motivated Seller and a motivated Buyer (and Broker for that matter). No, the market doesn't really care about the Seller's retirement, lifestyle needs, desires, or wants. On the other hand, the market also doesn't allow for bottom-feeder buyer types to unilaterally set the price either (for an above average business). Especially when you INSERT one ingredient: Competition.
If you are serious about selling a business, dealing mano a mano with one buyer is non-sensical. Doing so, completely stacks the cards to the Buyer's favor. I can guarantee you that if you hire an above-average business broker to sell your business (even if you, as the Seller, know who the 'best' buyer should be), that hired broker/advisor/intermediary should yield greater total purchase price than certainly their costs, but often significantly higher value above any transaction fee (plus we do a tremendous amount of work). As a Seller, especially if you do not have heat-sensing deal binoculars, you WILL step on land mines in virtually every step in a sales process. Experience matters. Standard of Care matters. How do you really know you didn't leave value on the table without serious competition in play? The sale of private businesses is an imperfect market, and, like anything, the more knowledge you have the better you can be prepared for the big dance.
On the other hand, as a Buyer, trying to source your own deals can be exhausting. Not only do you have to dance the Seller's value gap alone (often met with equal and opposite force) plus you never really know if the Seller is truly committed to the sale and a smooth transition (insert Seller Remorse). Ideally, a Seller when using a broker is a good thing for the buyer too. As a Buyer dealing with a Broker, if you hit the right deal price/structure then there should already be in place, a formal contractual commitment to sell (i.e. a Listing Agreement and Seller Resolution to Sell with the listing broker). Put another way, some Seller skin in the game. In many cases, creating a more liquid more efficient marketplace for private company business sellers and showcasing and aggregating opportunities for buyers are really what we are trying to facilitate when acting as an intermediary.
The obvious question still remains, when it comes to private company's value, what is the marketplace looking at? What is driving a certain deal to be higher (or lower) than the median, or Rule of Thumb averages? Have no fear, we will work through these common value drivers in great detail! Please download our free Common Value Drivers self-assessment grid here. Next month I look forward to diving in with you and discussing the prevailing market and economic conditions of small business transactions and our insights to where we are and perhaps where we are heading in 2021 and beyond.
P.S. - If any of these or future topics stir up additional thoughts, questions, or you have general feedback, let us know!
P.P.S. Feel free to email me at firstname.lastname@example.org for a free Value Driver assessment, and my personal broker's opinion, on any specific business that you may own.