“I’d love to know how much my business is worth.”
Invariably, that’s how the conversation starts. It’s an understandable question, and it’s one that most often our clients (and small business owners in general) are not equipped to answer. But while it’s a crucial element of the discussion – and a key part in determining available options, strategies, and exit paths – answering this question in isolation is an incomplete view of how likely you are to achieve the exit that you desire.
That’s why we talk to our clients about the concept of “Saleability”, and why we’ve created the EKSiT Saleability Score to help our clients understand that there’s more to the story.
In the simplest terms: your business may produce financial performance like clockwork, but expecting the market to (almost) automatically respond with a flood of offers that match the “on paper” valuation can lead to significant disappointment for a business owner that has not considered the other factors that play a large part in determining the market response.
You may have heard how active the acquisition/investment community has become in recent years (this may even be what has driven you to consider your own exit). While there is certainly truth to the rumour, it is evident that along with this increased level of activity has come an increased level of sophistication amongst those looking to acquire businesses. Buyers in today’s market are intelligent and discerning, leveraging the wealth of information that is now so readily available to evaluate the opportunity at-hand.
As a result, it’s not simply enough to “let the numbers speak for themselves” and have your financial performance be the sole driver of what the market will bear for your business. A modern buyer wisely considers areas such as the following:
– Customer concentration and any related dependencies
– Quality of Management Team (outside of the owner/operator)
– Employee retention (and turnover)
– Growth opportunities
– Physical location and quality of the facilities
– Industry growth trends (or potential regression)
– Barriers to entry
…and that’s just to name a few. All of these areas (and many others we include in evaluating the EKSiT Saleability Score) speak to the concept of Transition Risk, which essentially boils down to how much comfort a buyer has in projecting that they will achieve the same (or perhaps even greater) financial results than what you have enjoyed.
The greater comfort that your buyer has that he or she can achieve the same (or greater, once again) level of performance for years into the future, the greater the price he or she will be willing to pay to acquire the business.
Period. Hard stop.
Read that again and consider what it means for your business. Once we acknowledge the need to mitigate this transition risk (and the financial benefit to you in doing so), it becomes extremely clear that as a business owner it is unquestionably in your best interest to understand these areas and do everything you can to address them before taking your business to the market. While there is typically (and likely unsurprisingly) a cost associated with addressing these areas ahead of time, you’ll quickly find out that there is an even greater cost to you at the time of your exit should you fail to acknowledge them and undertake some level of a mitigation strategy.
There are, of course, times when it’s not feasible to address all of the potential areas detrimentally impacting your EKSiT Saleability Score before pursuing your exit. As you might expect, course-correcting in some of the identified areas can take more time than you can afford (or are willing) to take. Those who find themselves in this scenario are not simply up a creek without a paddle, as there is inherent value simply in having identified these potential areas. Often, if identified ahead of time, a package to prospective buyers can include these areas highlighted as opportunities – so that they aren’t later identified as areas of concern. While you’ll likely still have to share in mitigating these risks through the transition, you are at least an active participant in the discussion rather than having a sophisticated buyer dictate terms to you.
There are also ways to leverage deal structure to mitigate the Transition Risk for the potential buying pool, such as the incorporation of Vendor Take-Backs and Earn-Outs into the purchase agreement. These mechanisms may impact the certainty of your exit value – and at the very least they impact the timing of realizing upon the value that has been created within your business – but they can still help to bridge the gap between your Saleability and your presumed valuation.
None of this is meant to be alarming. The sky is not falling. But as the world continues to accelerate (seemingly at warp speed) well beyond the Information Age, we must be cognizant of everything that could derail our best-laid plans. You have worked hard to build the value of your business, so now that you’re giving some thought to how (and when) you’re going to realize upon that value, it’s important to flip over to the other side of the page to get an understanding of just how Saleable your business really is.