Business owners work hard for their money, and selling their business may be something they rarely think about. Then one day they mention to you that they just heard about someone in a related industry who sold their business for some astounding sum. They wonder if maybe this is something they should think about.
For the advisor, this is the time to listen. Maybe this indicates a hot spot in the industry and a time to capitalize on value. Tell your clients that it’s time for them to check it out.
Business owners often have no idea what their company is worth. As an advisor, if you try to list the value of the business ownership asset, you may quickly see how uncertain it really is. If you press the owner with the question of likely value, they may puff up and tell you, “Since Joe got $50 million for his company, I would probably get $100 million!” Or, if it’s been on their mind, maybe they had a valuation done by their CPA firm a few years ago. Without real market insight, neither hearsay rumors of other transaction values, nor careful mathematic tallies of the present value of cash flows, will give much insight about value. The object is to determine fair market value, salable today, which can become cash for the owners tomorrow.
Our firm has worked with dozens of astute and intuitive investment advisors who have given us the opportunity to quadruple (and more) their investment basis for key business owner clients. Sometimes those owners have only modest investment principal at the outset because they have grown accustomed to not counting that piece of their net worth as mobile. They treat it as if it’s off-limits for any potential liquidity.
We worked with a firm some years ago in Memphis whose owner contemplated sale because the business was doing well, was 65 years old and because his second-in-command son astutely said, “The market is huge right now. It’s time for us to consider it.” The owner did have a nice personal investment account started, with about $4 million tucked away from many years of hard work. Together we agreed that we needed to get at least $30 million for the company to be in range of fair value for sale. There were some magnificent competitive forces in play, and the timing was ideal. We got $67 million – all cash – for that company. Our investment advisor friend turned a nice $4 million investment account into about $60 million after tax. He was a happy advisor!
Our firm is often called upon to do what we refer to as a “salability review” for our clients. When we do that, we study the financial histories, inquire about operating issues, review real estate relationships and study M&A markets and recent transactions to get a strong feel for pricing and trends. The net product of such review is two-fold. We provide an estimate of likely salable value today, along with our best approximation of percentage likelihoods at various pricing thresholds. We further present an analysis of selling strengths and weaknesses to give owners a sense of what business attributes need to be nourished, or corrected, in advance of a sale in order to maximize potential outcomes. We charge $10,000 for this analysis, and we typically spend between $20,000 and $25,000 worth of time to put it together. It’s worth the write-off to us, though, because it lets us get to know the prospective client, so we really know if it’s a job we can do well; and if we do later get to sell the company, hopefully it will be a company worth more.
Encourage your business owner clients to think about real salable value, and to keep tabs on it as it changes, to identify the right possible timing for their move.
A friend of mine, who is an investment advisor, seems to do a magnificent job in coaching his mid-sized company owner clients. (He also seems to consistently win their eternal loyalty.) He emphasizes business value by taking every owner’s business value into his asset analysis each year, with a simple conservative value based consistently on four times the pre-tax income. That’s usually very safe – manufacturers might sell for between five and seven times pre-tax earnings, whereas an “average” mid-sized service company might go for more like three to six times pre-tax earnings. His objective is to put in a safe number that should be readily realizable someday. As owners watch how that value changes over time, and as they see how significant it may be to their overall net worth, they begin to take a heightened interest in its evolution.
If a little bit of discussion with your client tells you that they may consider sale, encourage them to get professional help. Private investment bankers who focus on the sale of companies can often get two or three times more in cash at close than the do-it-yourselfer. Why?
- They have experience. The owner operator does not.
- A careful and competitive sale takes an enormous amount of time. (We average more than 2,000 hours per transaction.) It’s impossible for a seller to spend the needed time all alone.
- Your client needs an advisor with an incentive to get the deal done. (Not his CPA, who will lose a client at close; not his attorney who has a myriad of scheduled appointments every day.)
- A third party can describe your client’s company much more effectively than he could ever do himself and still remain credible. (It’s like if a friend wants to get you a date and says, “He’s a good-looking, witty, great guy”–it plays much differently than if you say it yourself.)
- An outside agent creates the feeling of competition. If the owner has hired this firm specifically to sell his company, buyers know that there will be competition, and they respond accordingly. (Al Capone said you can get a lot more with a kind word and a gun, than with a kind word alone. The seller’s agent for competition is his gun.)