In 2017, I attended an excellent seminar put on by the Ivey School of Business in London, Ontario, which spoke extensively about how the world around us is changing, how consumer expectations are adapting with those changes, and how technology is impacting the way that people consume.
This seminar focused mainly on disruption, but one of the contributing factors that has led to disruption that I was intrigued by was the fact we are no longer in the “Age of Information”, we are now in what they call the “Age of the Customer.” I can get into the history of it all, but I don’t want to waste your time. Basically, consumers now drive the bus on EVERYTHING. They have options, expect things right away, and have zero patience. I don’t say this to be condescending; it’s simply the world we live in now. As a result, though, businesses that have models or philosophies that aren’t 100% customer-centric are ripe for disruption. This forced us to navel-gaze a little bit. While our model was founded on the concept of customer centricity, and was already what we thought to be “disruptive” in our industry, when we looked more critically at ourselves, we realized our model wasn’t ENTIRELY customer-centric. This is what motivated us to make a dramatic change for the sake of the client.
Our industry has always used a pricing model for the sale of businesses that was driven entirely by a company’s enterprise value. Essentially, the more you were worth, the more you paid. What these models have never taken into consideration is the anticipated likelihood of success. For example, if there was a business that was worth approximately $9MM, and another that was worth $2MM, their fees to advise/execute on the sale would be entirely percentage based, regardless of whether the $9MM was considerably more saleable. Let’s simplify it even more:
– $9MM value
– Extremely saleable
– Very little risk to whomever they hire to facilitate the transaction
– In excess of 75% likelihood of successful outcome
– $2MM value
– Noticeable issues with the business that would make it very difficult to sell at that valuation
– Considerable risk to whomever they hired to facilitate the transaction
– Approximately 25-35% likelihood of successful outcome
The model that has been in place for decades would take the value of each company and apply a percentage to the completion fee. Some would apply a flat rate of 10% of the Company’s value. Others would operate with a sliding scale (8%, 6%, 4%) beginning with the first million dollars, and working down to 4% and leaving it there. While the models vary slightly, the concepts have always remained the same – and they’re also the same in that none of them factor in the risk or saleability of the business. At EKSiT, we believe that the $9MM business that has clearly done something right and has created a profitable and sustainable business with very little in the way of saleability risk should be rewarded.
It is for this reason that we have used our proprietary EKSiT Saleability Score as the guide for our fees in helping sell businesses. The more saleable shouldn’t be subsidizing the less saleable. If we take on less risk because of how well we know the market will respond to your business, you should get that savings. Right now, the existing model in the industry penalizes those that have created saleable businesses because, typically, there is a tie to size and saleability. The larger you are, the more you’ve previously paid. It’s basically saying “Congratulations on having built a larger and supremely saleable entity, you get to pay more!”. It’s a sneaky way to have the riskier propositions be subsidized by the businesses that carry very little risk. This concept didn’t sound too customer-centric to us, so we decided to take the leap and disrupt the old model, using technology (the EKSiT Saleability Score) to do it.
Our industry was in need of something different – something that’s customer-centric, and rewards the businesses that have worked hard over the years to develop into something highly saleable. The investments and improvements you make in your business today should mean something to you in the end – and our pricing model makes sure that you get to keep more money in your pocket when you’ve built a saleable business. You’ve earned it!
Author: Trevor Greenway
Trevor is the VP & Director of Client Services at EKSiT Strategies. He maintains close contact with our clients and guides them through the planning process to discover their exit options and develop a clear path to help them achieve their ideal outcome.