I got a newsletter today from a friend (Jay Carter) who runs a one man business for helping business owners prepare to sell their business.
This transaction is often the single largest financial event for owners and what funds their retirement and pays them the biggest dividends for their years of hard work, stress, and struggle.
Given that, it’s amazing how few treat it like the treasure it is and go into the process with as little preparation as they do. His goal is to change that and I thought his newsletter did a great job of highlighting the challenges.
Check out what else we’ve been up to!
- Matt Reviews: Is This Advice Going to Help You 10X Your Business? (Short Video)
- Matt Reviews: Does Your Business Meet These 5 Business Must-Haves? (Short Video)
- Matt Reviews: How Should You Price Your Ecommerce Store? (Short Video)
- Business for Sale, Would I Buy It? | Online Moving Platform (Short Video)
- How the Right Bookkeeper Can Boost Your Growth (Podcast)
He started off by describing the would be seller:
The business is a family-owned OEM manufacturer of specialty automobile parts serving Tier 1 suppliers and aftermarket distributors. The company generates about $15 million in annual revenue. The owner, Mark, is 63 years old, has devoted decades to building the business, and is now eager to retire.
Based on “gut feel” and industry chatter, he believes the business is worth $18–20 million. He knows “for sure” that it’s worth more than his competitor, which he heard recently sold for “about $15 million”.
At first glance, the numbers look solid:
– Revenue: Steady at approximately $15 million over the past three years
– EBITDA: Around $2.2 million annually (almost 15%)
– Employee Base: 74 skilled, long-tenured workers with low turnover
But here are the problems:
- Undiversified Customer Base: One large automotive OEM customer accounts for 55% of total revenue. This is a significant risk and undercuts the value of the business.
- Unhealthy Financial Reporting: Financial statements weren’t GAAP-compliant, and Mark only reviewed complete financials annually. In addition, the accounting practices used were inconsistent from year to year. The lack of timely, accurate, and consistent reporting undermines trust, complicates due diligence, and erodes value.
- Unarticulated Differentiation: When asked what set his components apart from competitors, Mark gave vague, technical answers that failed to clearly define a sustainable competitive advantage. If the seller can’t clearly articulate what makes the business unique and different from the competition, then it looks like a commodity play and that drastically hurts the value.
- No Post-Exit Plan: When asked what he’d do after selling, Mark shrugged and said, “Probably go to the beach more often and play more golf.” Without a clear vision for life after the sale, owners often delay or derail a transaction at the last minute. Buyers want to buy from a seller who is going to sell. A seller not committed to the process is going to turn off buyers and hurt the chances of the deal actually closing.
- No Documented Growth Plan: Revenue had been flat for several years, and there was no written, defensible plan for expansion into new product lines or markets, or further penetrating existing markets. Flat revenue and no clear plan for growth hurt the value and add risk to the deal for the buyers.
- Unrealistic Valuation Expectations: Mark had no idea what his business was really worth in the marketplace. This is one of the most common and most damaging mistakes sellers make when preparing to exit. Unrealistic valuation expectations damage credibility, discourage serious buyers, waste time, and often prevent a successful sale altogether.
Fortunately, if you know the problems, these things can all be fixed. But if you have no idea that they are problems or you refuse to consider them a serious impediment to selling then you either fail to sell or else have to accept a much lower valuation than you could have gotten with some preparation and planning.
The best strategy is to always run your business as if you could sell it tomorrow. Beyond that, think about it objectively and dispassionately, the way a buyer would, and be prepared to answer questions like the above. Have a solid understanding of what it is worth and what asks add value and hurt the value, and do what you can to move it in the right direction.
Even if you don’t sell for a long time, the truth is that by doing things that make the business more valuable for a buyer you are also automatically doing things that are going to make the business more valuable to you in terms of profit, cash flow, and equity appreciation.
If you’re wondering what your business is worth or how to take action now to make it worth more when the time comes to sell, let me know! I have these conversations all the time, and I’m happy to help you figure out how to get the most for what you have!