The Importance of Reflecting on the Value of Your Business
We talk to a large number of business owners here at Mercer Capital, and in the course of those conversations it has become clear to us that many business owners have not done a great deal of thinking about the value of their businesses. When we talk to these business owners about potential transactions, they often have no (or an unrealistic) notion of the economic benefits associated with their ownership interest in the business.
“Well,” they say as the meeting begins, “I never really thought about selling my business until now, so I never took the time to enumerate the benefits I receive as the owner of the business.” A corollary to Murphy’s Law states that any time the seller is unprepared for a deal, the buyer will require that the deal move along very quickly. The lack of preparation on the part of the seller leads to second-guessing down the road. “Did I pass up a good deal?” ask those who decline the offer. “Did I present my business in the best possible light and maximize the proceeds from the sale?” ask those who accept.
A little time spent thinking about the business without the pressure associated with a deal on the table will provide important perspective when push comes to shove. It is much easier for a seller to walk away from an underpriced deal when that seller is confident that the financial rewards associated with continuing to hold the business interest exceed the offer. By the same token, a seller is less likely to miss a liquidity opportunity by refusing to entertain an offer if the seller recognizes that the offer is within a reasonable range.
For these reasons, we recommend that all of our clients, regardless of whether you are actively pursuing a deal, give some thought to the financial rewards associated with your investment in your business. Mercer Capital offers a complimentary booklet entitled “Is Your Business Ready for Sale?” that will help you establish an intellectual framework for thinking about a transfer of an interest in your business.
Having “done your homework” by researching the shareholder-level benefits associated with an ownership interest in your business will also help you present your business in the best possible light to a potential buyer. A seller who is unprepared to explain the rewards associated with owning the business is leaving money on the table in a sale. And in these days of market consolidation, vertical and horizontal integration, and pursuit of economies of scale and synergy, the group of likely buyers even for small businesses is becoming increasingly financially sophisticated.
All of us have heard about the discussion of features and benefits that takes place during the sales process of a product or service. The most successful salespeople not only explain the features of the product or service, they also explain the benefit to the buyer of those features. Heated car seats are a feature. A warm rear despite the cold morning is a benefit. A good car salesman will explain the benefit of heated car seats, not just mention the features of the car.
A transaction involving a business is certainly more personal and more emotional than the purchase of a car, and a large number of additional factors come into play. But it is still important to frame the discussion of your business not only in terms of the features of your business, but also in terms of the benefits associated with the business. In the case of a financially sophisticated buyer, this means being able to discuss the business in terms of the economic rewards associated with ownership.
For example, the fact that you as a business owner worked long hours for many years for what you consider to be a below-market wage might be considered a feature of your business. On the other hand, if you talk about the loyal customers who pay your company a premium price due to the high level of service you provide, you are illustrating the value to the buyer of the long hours you worked. Similarly, instead of just pointing out the fact that you accepted a low wage in order to help the business grow, show the potential buyer the new equipment that will allow for future growth without additional capital expenditures. In short, look at your business with a buyer focus, much as you look at your product with a customer focus.
The primary message of any communication with a potential buyer has to relate to the value to be received by the buyer as a result of the transaction. Buyers want to know about the expected cash flows associated with the potential investment and the risks associated with those cash flows. They want to understand the most favorable, most likely, and least favorable projection scenarios and the relative likelihood of experiencing each.
Ask yourself right now how you would present your business to a potential buyer. Are you prepared to enumerate the benefits of ownership of your business? If not, you need to begin thinking about this now, before you are faced with transaction decisions. A thorough under-standing of the benefits of ownership of your business will help you determine the minimum consideration you will accept in a transaction, and it will also help you negotiate the maximum possible consideration in an actual deal by communicating effectively to the buyer the financial rewards associated with ownership of your business.
For more information or to discuss a potential transaction, call us at (901) 685-2120.
Reprinted from Mercer Capital’s Transaction Advisor – Vol. 3, No. 1, 2000.