Wherever people talk about businesses being sold, the conversation inexorably gravitates to two things; value and risk. We’ll tackle the valuation thing in a future installment and elsewhere on the Suitegum web site, but for now I would like to visit risk.
In that hypothetical conversation above, the risk always seems to be for the appetite of the purchaser. You know; he was sold a lemon, or he was never cut out for that sort of business, or the staff all bailed on him soon after he took over, or half the customers were the seller’s wife’s friends and they have all stopped buying, or the anchor tenant moved away, or… and so it goes on.
But if you are the eventual seller of a business, you are probably not much interested in the problems buyers have, are you? Perhaps that is the problem with suppressed values
One of the first things that any prospective seller of any business asks me is what price do we think we can get for their business. Either that or he tells us exactly what he wants, and what his bottom line is. Either way, I think we can safely infer that it is the money that most sellers are after, and why not?
If sellers want to get paid for the business that they are getting out of, then not getting paid is a significant risk, which can be minimised through good transfer management. That management could include managing the process of agreeing to any term payments in order to get an even higher price. This is a popular way of selling businesses in other parts of the world, where small businesses trade at significantly higher PE ratios than they do in South Africa. There is no reason why we shouldn’t try it here from time to time with the right businesses. Is yours one of them? I can report that one of the reasons that businesses are getting significantly higher prices in the greater than R20M mark is because sellers are agreeing terms on the one hand, but are also prepared to warrant future earnings while they stay in senior management during that pay out period.
Another realistic risk to closely held family businesses is the prospect of the family heirloom and legacy being destroyed. After all, it would be nice to be able to point to that landmark and tell your grandchildren that you started it. The only real solution to this is to refuse to sell to someone who you may judge to be incompetent. But then a cold hearted objective process degenerates into a subjective, indecisive one.
If your business is well prepared though, the prospect of kicking a poor purchaser into touch should not be that scary because, as we’ll see later, you will have more than a few potential buyers chasing your offering. There are not that many sellers around who would have the constitution to refuse the money in these circumstances. But by the time you have worked through this course, that could be your profile.
My biggest concern with presenting this series is this: Are you selling your purchaser a good business? Well hopefully you are honest, and you are reading this to maximise a fair price, rather than rip the ring out of some poor unsuspecting buyer. Of course that is your next risk; being sued by the purchaser, and losing! We can deal with that too. And as with most things that are painful, prevention is better than cure. Truth will keep you free. Keep that in mind.
For now you need to consider that when you do eventually take your business to market that you present the best butcher, baker, tinker, tailor, or whatever that there is for sale at that time. That is the aim.