Maximizing for Tomorrow

Marketability VS Valuation

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Last week I sent you to the Blog of Rose Stabler of Certified Business Brokers in Houston to study her list of factors that drive the value of a business. Today I want to talk about marketability. Value is certainly something a business owner should be concerned about when they are thinking about their retirement and selling their business. But marketability is more important!

Here is a harsh reality. You can have a business that makes good money and is a high performer but is totally unable to be sold. On the continuum of factors that drive value, negative manifestations of these value drivers can act like an on/off switch to the potential of being sold. Here is how some of those value drivers manifest negatively.

The owner’s contribution is overly significant – buyers will feel there is no way the owner can be replaced and avoid the deal.

Lack of operating systems and procedures (Stabler’s driver # 6) – Having these drives value. Not having them increase the risk of a buyer replicating your results. If it’s all in people’s heads, its not likely a buyer is going to take the risk.

Poor quality financial information (Stabler’s driver #2)– If your financial information is hard to understand, not accurate, doesn’t hold up to scrutiny under due diligence, you chances of getting a deal done is small.

Over concentration of customer base (Stabler’s driver #3) – If a buyer thinks the loss of a single client can dramatically affect the viability of an acquisition, they are really going to think hard about whether it is worth the risk.

Here is what you need to know and take to heart. Business values don’t go in a steady curve from value higher to the value being lower and lower. They go from “you have a premium value, to “you have to have the minimum standard to sold” to “you can’t even be sold at all!” And there are more businesses in the “can’t be sold at all” category than the premium and minimum standard category combined.

If it is your plan to sell your business, don’t take this chance. Evaluate your business against the value drivers and understand what you might have to change to make your business marketable or to improve your value.

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Business Valuation - Value Drivers

This month I am discussing the subtleties relating to achieving value. Our theme is that ‘achieving value’ for a business is far from a simplistic concept.

In my last post I discussed the importance of subjective factors in driving value. But there are far more.

Rose Stabler at Certified Business Brokers in Houston recently posted on her blog an excellent list of what I call ‘value drivers’ – things under your control that directly affect the value you can achieve for your business. Do yourself a favor. Read her post and measure what’s in your business against the factors she’s discussing. These have deep ramifications for your exit and succession planning which I will discuss in more depth next week.

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Business Valuation - the Subjective Factor

What price will your business bring in the marketplace?

It's one of the most important questions you face when weighing your business exit options and one that is often misunderstood.

There is a difference between independent valuations and values actually achieved from transactions.

The criteria for business valuation methods have become more and more standardized over the last decade or so. Individuals who provide valuations on a professional basis usually are accredited via very rigorous processes.

Yet there is often a significant gap between the value an independent valuation will report and the value a business can actually receive if it is sold.

Why is this?

The simplest answer is that independent valuation formulas have difficulty quantifying the subjective factors upon which real buyers and real sellers act. Take this actual example that I worked with:

The business had two equal partners. Over a long period they gradually began to have differing goals and to conflict with one another. Ultimately one was willing to pay a premium to get the other out and end the conflict. However, standard valuation methodology called for discounting the value of the equity bought for reasons of lack of marketability and lack of control.

When you contemplate selling your business, get that expert valuation but also consider the subjective factors that could have a positive or negative effect on your unique situation.

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Getting the Reward You Want and Deserve

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Avoiding the Four Horsemen of The Business Owner’s Apocalypse – Getting the Reward You Want and Deserve – The Trinity of the Business Owner’s Salvation

We’ve been discussing over the last five weeks four behaviors that consistently, time and again undermine business owners from achieving the goals they most deeply want – a rewarding, satisfying conclusion to their lifetime of business ownership. I have been so appalled over the years at how consistently these four behaviors – Denial, Delay, Disruption, and lack of respect for Detail – undermine even the most successful of businesses that I coined a term for them, The Four Horsemen of the Business Owner’s Apocalypse.

If these behaviors are so pervasive and insidious, how then can and should an owner overcome them? By a adopting what I call the Trinity of the Business Owner’s Salvation – Vision, Planning, and Guidance.

Vision is creating a clear picture of what you want from your business ownership transition to look like. We go into denial and delay because we are fearful of what the end might look like. So we don’t deal with it. By thinking through what we want (even if we’re not sure how we are going to get it), we create a goal, something that should be attractive to us, something that we don’t want to deny or delay but encourage and facilitate.

Planning allows us to map what we need to do to accomplish our vision. It creates the pathway. Planning with benchmarks overcomes the delay and allows us to get on track when we are disrupted.

Guidance is having the mentor, the coach. You’ve not done this and you need to align yourself with someone who has. Just as no great athlete goes without a coach, neither should you try to navigate this most important of transitions without a guide. Your guide will remind you of your plan, keep your vision in your mind to motivate you, and bring the experts with the detailed knowledge that you need to make your vision happen.

With Vision, Planning and Guidance the Four Horsemen will be put in abeyance and you will get the reward you deserve.

Detail (Lack of Respect For) - Fourth Horseman of the Business Owners' Apocalypse

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I get a lot of puzzled looks when I bring up this one. Clearly I was stretching for a fourth Horseman wasn’t I? But this last Horseman is yet more subtle and insidious than Disruption. Because his is the Horseman that sits inside of each business owner and convinces him that he doesn’t need experts, that he can do things alone.

It is a basic tenant of entrepreneurship that you have self-confidence. Without a deep, strong reservoir of self-confidence and self-reliance you would never have started your business. You would never have overcome all the obstacles to get to the point where you have a business that can allow you to retire in style.

And this same self-confidence causes you to be skeptical about asking for or accepting help…especially when you have to pay for it. So you don’t. You assume you can figure it out no matter that you have no experience or expertise. And when we deal with the disciplines that allow us to maximize our business value and achieve a transition from our business, this can be deadly because the skills needed are very different from those that you use to build and manage your business.

Lack of respect for the detailed knowledge that others can bring can lead to decisions that make a business unsalable, can cause you to grossly underestimate how much you will need for your post-business ownership life, or pay far more in taxes than you expected. It can undermine all of your other good intentions.

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