It is a common occurrence for clients to walk into our lobby expecting to sell their business in six months for the seller-friendly multiples of earnings that exist in today’s M&A market.
We can help achieve this for the clients who have properly prepared their business for sale. Unfortunately, those clients are a minority. Most sellers have not adequately prepared their business to realize maximum value upon exit. In fact, many businesses can’t be sold at all.
The unprepared seller either settles for a lower purchase price or takes the business off of the market so that he or she can work “on” the business (as opposed to working “in” the business) to make it a more attractive acquisition candidate. Every situation is different and there are numerous aspects of a business that may need to be addressed to increase its value. But, if I had only one word to describe the most common factor that de-values the unprepared business that word would be “RISK”.
Savvy business owners know that they must focus on more than their income statement if they want to maximize the value of their business. A buyer is not paying for the earnings realized by the seller…the buyer is paying for the opportunity for those earnings to continue and grow post-closing. The higher the risk to future earnings, the lower the multiple of earnings that the buyer will pay.
Risks that threaten the sustainability, profitability, scalability or transferability of a business will substantially diminish its value regardless of how strong the earnings history is. The good news for owners looking to maximize the value of their business is that many of these risks can be limited, and in many cases eliminated, with proper focus and planning.
An experienced business lawyer can play a critical role in formulating and executing an effective de-risking plan. Please stay tuned for the upcoming MLBMO blog series on de-risking activities.
This post was written by Chris Brodman