Bridging the Value Gap
When selling a business, there is nothing more disappointing than realizing there’s a gap between what you want to put in your pocket and what potential buyers are willing to pay. But in a sale process there are many more gaps than you might imagine.
There are valuation gaps generated by timing issues between a “buyer’s market“ and a “seller’s market.” There are gaps in the value you perceive you’ve put into your business and what a buyer perceives he or she can get out of it. Even the various methodologies (income, asset, and market-based approaches) used to establish business appraisals generate value gaps.
There are also differences between what an owner needs to support a retirement lifestyle and what can be extracted from a transaction at the actual time of sale, as well as differences between an offer to buy, what the buyer pays, and what the seller ultimately gets. And finally, the timing of retirement and buyer’s vs. seller’s perception of risk in future growth and earnings flow for the business can increase the valuation gap.
Selling a business is a complex financial and psychological process with many moving parts, any one of which can cause a major misstep resulting in a negative impact on value. Value is much more than financial, it is the sum total of all the factors that contribute to the seller’s level of satisfaction from a transaction.
Why These Gaps Exist
According to the Business Enterprise Institute, the biggest issue is that owners don’t believe these gaps exist: at least not for them. And if owners aren’t convinced that the gaps exist, they will be reluctant to invest any resources into bridging them. Harvard Business School Professor Howard Stevenson has stated that this common misperception is based on the entrepreneur’s inherent optimism and lack of knowledge. Separately, these issues are unhealthy, but together they create a massive obstacle to planning a successful transition, ultimately killing a satisfying exit experience.
Typically, owners overestimate financial value because they know how difficult it was to start and build their business to its current state. They fall victim to the notion that what they put into the business is the same as what a buyer will get out. They are bullish on future business growth and investment performance. They are in denial about how much money they will need in retirement to maintain a desired lifestyle, and haven’t given a whole lot of thought to how long they will live after they leave their companies.
Owners often use this optimism and lack of knowledge as license to postpone taking the actions necessary to create the desired outcome. Until they understand that where they think they are is far from where they actually are, and that where they need to be is even further from where they think they need to be, it is business as usual and nothing will happen. Knowing — not guessing — what you have and what you actually need is key to closing the many gaps that exist.
Owners who haven’t thought through life after the sale of the business often minimize or overlook the non-wallet considerations altogether. The Successful Transition Planning Institute (STPI) calls these the head and heart issues around leaving a career. These are the “soft” emotional challenges that transactional advisors don’t address, which, if not resolved up-front, can cause an owner to sabotage a transaction for no business reason.
How to Close the Valuation Gap
When considering a sale, an owner’s goal is to achieve perfect alignment (zero gap) between the various factors. For most owners, this is difficult to achieve without the help of experienced advisors. The table below shows some of the areas that skilled advisors can address.
- Current Business Value
- Funds for future lifestyle
- Post transaction Business Leadership
- Business Value Enhancement
- Seller “Peace of Mind”
- Purchase Offer Vs. “Take-Home”
- Pre-Sale Process Coordinator
- Financial Planner
- Succession Planner
- M&A Advisor
- Transition Planner
- Tax/Legal Advisor
- Exit Planner
Selling a business is largely uncharted territory for people who have spent their lives developing processes that provide, market, and sell a product or service at a profit. But when it comes to implementing an effective process that markets and sells a business, the game changes dramatically. In nearly every case, it takes a team of experienced, subject-matter experts to navigate out of the briar patch of legal, accounting, valuation, planning, and marketing considerations that are involved.
An exit advisor can address the biggest gap of all: providing an understanding and knowledge of the difference between imagination and reality ahead of the negotiation process. It takes time and experience to bring everything into alignment and owners struggle to coordinate this unfamiliar process while still running their business. It was Mark Twain who said “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”
Gary Ampulski is Managing Partner of Midwest Genesis (www.midwestgenesis.com), a Business Value Enhancement and Transition Planning/Execution firm. He is a seasoned operating executive with experience in start-ups, joint ventures, internal growth, corporate development, turn-arounds, workout and M&A transactions. Contact Gary at (847) 573-9966, email@example.com.
Gary Bozza, President & Managing Partner of WorldBridge Partners Chicago NW, has been winning industry awards and recognitions in talent acquisition for the last 23 years, following a highly successful 18-year career as Vice President of National Accounts and Director of Midwest Sales primarily at MOORE (now RR Donnelley). Gary’s business is dedicated to helping Owners, CEOs and Presidents hire industry talent, drive new revenue, optimize operations and maximize enterprise valuation. His firm specializes in executive recruitment and coaching owners on how to improve the eight key drivers of business value from the “buyers set of eyes.” He has helped dozens of GLGA members produce significant growth and profits results in a variety of ways for their businesses. Gary is a Certified Value Builder Coach. Contact Gary at (847) 550-1300 ext. 33, firstname.lastname@example.org.