SELLERS VS. BUYERS
Sellers often feel that buyers or appraisers undervalue the business because the buyer doesn’t understand the business model, or because the valuation methods fail to take into account unique qualities of the business.
THE IMPORTANCE OF ACCURATE FINANCIAL RECORDS
While it is true that different valuation methods may result in different values for the same business, one thing that can’t be overstated is the need to have accurate financial records. Most company financial statements contain errors, so it pays to go through them well before any potential sale to ensure that your numbers will hold up to the rigors of an audit or other intense scrutiny during due diligence.
DIFFERING VIEWS OF THE BUSINESS
In addition to potentially inaccurate financial statements, another reason for differing perceptions of value is how the buyer and seller view the business. Sellers would do well to consider valuing the company from two perspectives: that of a financial buyer, who is evaluating the business as a stand-alone investment with no anticipated synergies, and that of a strategic buyer who may see additional value due to synergies such as acquiring a competitor’s customer base.
DETERMINING A REALISTIC VALUATION
In each case, a realistic valuation of a company should be determined early on. The seller should have made decisions about the asking price and terms, the expected price and terms, and the walk away price and terms. These decisions should be made before getting caught-up in “deal fever.”
Anyone who is self-employed is essentially running a business. But not every self-employed person has a business to sell. The difference comes down to whether you have created value that is independent of your own ongoing involvement. Obviously a business owned by a passive investor doesn’t depend upon that owner for its success. But this can be true for a solopreneur as well.
For example, if you are an inventor with a patent for a new manufacturing process or a software developer who has written a new mobile application, a buyer can pick that up and run with it because the patent or mobile app has intrinsic value. If you simply offer a service to the public, then there may be much less value to offer a buyer if you are no longer part of the business.
If you are in the latter group, there are ways to add value and potentially create a market for someone else to buy you out. One factor that a buyer will want to see is predictable future income.
If you are a service provider who works on an “as-needed” basis for customers, there’s no guarantee of future revenue, especially if the primary service provider is leaving. But if you have an established client base with longer-term service agreements, then it is easier to show the likelihood of ongoing revenue.
In addition, it would be wise for the seller to remain involved in a transition role after the sale to help introduce the new buyer to the business and its customers.
Another way to add value is to demonstrate a new, but untapped market segment, or an opportunity for a buyer to develop a new service line or product.
Take some time to figure out if you have a business to sell. And if you’re not sure, it may be a good time to make some plans to ensure that you are creating unique value that will be worth something to a prospective buyer.
If you are starting to think about retirement or just want to spend less time on your business without giving up total control, consider hiring a temporary Chief Executive Officer. Using an interim CEO lets you see what life is like outside of your business. It also can be a great way to transition to retirement or other new ventures.
Advantages of hiring an interim CEO
Advantages of hiring an interim CEO include the ability to step back in if your inner control freak won’t let you give up the reins. It also means that customers and vendors are still dealing with the same owner. In addition, hiring a CEO is much less complicated than a full-blown exit and may boost the value of your business by demonstrating that it doesn’t need your daily involvement.
Challenges of hiring an interim CEO
A downside of hiring a CEO is that you’ll have to trust someone else to run your business. Not every hire will work out, so you may have a false start before finding the right person. If the new CEO’s leadership style or personality is different from yours (and it will be), employees may be less inclined to work as hard or as well as they did for you. Perhaps the most obvious drawback is that you will need to pay the new CEO a big chunk of the money that you used to pay yourself.
While it may not be the best choice for owners who expect to continue taking significant amounts of cash out of the business, testing the waters with an interim CEO can be a great way to literally buy more time as you refine your ultimate exit strategy.