One of the things I enjoy most about my work is a celebration dinner. It’s great to have an informal catch up with the Owner(s) after the sale has gone through and everyone has had the chance to catch their breath. It’s also great to be able to reflect on what has happened and, for me, get direct feedback on each Owner’s experience and what the key takeaways are for next time.
And I always find it interesting what gets said – either directly or in testimonials that my clients provide. In most cases, the feedback does not come as a surprise, but it does help reinforce what is important to my clients and what ultimately helps to get successful deals done.
So, with the calendar year coming to a close, here are 9 key takeaways from deals in 2018:
1. Professionalism and confidentiality do matter.
A consistent theme in feedback from Owners is the importance of professionalism and confidentiality. An owner’s business is an important asset (for some it may as well be part of the family!) and Owners are very conscious of doing the right thing!
A lot of information is shared in a sale transaction. Often it is hard for Owners to know what information really needs to be shared and when. It’s also very hard to be objective when it’s your own business. This is where an independent view, project management expertise and prior deal experience is invaluable. While each situation is different, experience helps exercise good judgment in providing just enough information at just the right time. This helps to proactively advance discussions and conclude a deal, without showing everyone, everything from day one.
2. “Valuations” are challenging and can often be misinterpreted (A).
A transaction is always going to be underpinned by perceptions around value and some form of valuation. Each Owner will have their own pre-existing views on value – sometimes this is also influenced by a business appraisal prepared at the start (e.g. by a business broker); for others, it’s because of a valuation opinion expressed by an ‘independent’ party (usually from a suitable Chartered Accountant or Advisory firm).
It’s important to recognise that appraisals and valuations reflect a view on the business at a moment in time and under a certain set of circumstances. These circumstances are likely to change – hopefully improve, but it’s also possible that they become less favourable. In any case, you can never be sure what the actual market value is until the deal is ultimately done.
Therefore, a valuation prepared two years ago may be completely misleading today. This is not to say that the Valuer at the time was negligent, but as circumstances change it makes sense for an Owner to frequently revisit and revise their situation.
For example, one of my clients had their accountant prepare a valuation some four years prior to the sale process actually starting. Unfortunately, my clients’ accountant at the time was not experienced in valuations and they based their valuation on third-party benchmark information, which the accountant had completely misinterpreted. This led to the Owners having a lower valuation expectation for a number of years. The good news is that we could address the valuation issue when I completed my business appraisal and so achieved a successful sale outcome at a higher multiple.
3. “Valuations” are challenging and often can be misinterpreted (B).
Sometimes the Owners and the Purchasers will agree to undertake a formal valuation to form the basis for the transaction. This can be a sensible step to help start discussions, but the reality is that as an Owner you will still need to be fully aware of the basis for the valuation and be prepared for some in-depth and potentially time-consuming negotiations if you want to achieve full value.
While at first glance an external accountant might seem independent, it’s important to understand who is preparing the valuation; who they are acting for and under what circumstances that valuation is being prepared. If an Owner doesn’t fully consider this then their business will be under-valued, and they will be leaving money on the table.
This happened to a client of mine who was selling their business to a corporate, who had asked that a valuation be prepared by a well-recognised accounting firm in order to determine the transaction value. While my client was happy for the valuation to be prepared, it was clear that the valuation did not fully capture the future value of the business. After some in-depth analysis of the draft valuation, targeted questions to the Valuer and a little negotiation, we were able to increase the final purchase price by some 30% on the initial draft valuation – an outcome my client was very happy with.
4. Money is very important, but it’s not everything.
When I am acting for my clients I am always trying to get the best possible price for them in a sale. More importantly, I am always trying to present to each Owner what their options are and what the associated pros and cons are so each Owner can make fully informed decisions. Often there is more to a transaction than pure dollar outcomes – the specific terms of the deal (e.g. timing, finance, ongoing employment, the composition of the purchase price) can be the make or break of a deal.
It also never fails to surprise me how balanced owners are in their decision making and how often it’s not the highest value (dollar-wise) offer that gets chosen as the preferred purchaser for a sale.There are many reasons for this, but one issue I talk in-depth with Owners about is the respective probabilities of different offers crystallising into a completed deal, i.e. often high-value deals have a disproportionately high chance of not completing.Alternatively, the potential purchaser may be looking to make substantial changes to the business and the Owner is not comfortable with moving forward.
What is important, however, is that the overall deal is favorable, and it leaves each Owner better off than the status quo (otherwise why would they ever sell their business?!?).
In the second part of the article I deal with the “Last Resort” scenario; knowing more than who the buyer may be; what to do when it all becomes too hard; the “lifetime event” and distractions during the sales process.