When an M&A firm is devoted to selling—not simply listing— businesses, they take the time to assess the likelihood that a business will be saleable. At Calder Associates, we have formulated a process for selecting the businesses we want to work with. After assessing that a business is indeed saleable, we posit two crucial questions to a business owner:
I. Are you realistic about your selling price?
II. Are you truly ready to sell?
If we hear a resounding “YES,” and we believe the market is receptive, we proceed with the signing of an agreement. Nonetheless, as our firm has learned, a business’s viability on the market can always change. Under financial pressures or losses of personnel, desirability is not a certainty.
An Anecdotal Indicator
Our Mergers and Acquisitions firm is working with a 75-year-old business owner focused on retirement. Since signing an agreement with this client, his business has had a 25% drop in sales. Accordingly, the offers from buyers have been lower than what had originally been agreed to; frustrating the owner. He argues that the value of his business is in the business that he has built over 30 years; not the way it’s currently performing. We sum this up as: our client wants to be paid for his efforts.
All businesses, regardless of the industry, are valued according to their EBITDA or “earnings before interest, tax, depreciation, and amortization.” The more financially successful a business is, the higher its valuation. Despite how venerable it may be, a business’s legacy has no bearing on its valuation if the business performance is declining. In the case of our client, he requires at least a 25% increase in sales and a 50% increase in EBITDA to obtain the selling price he envisions.
Take the Deal!
Unless they’re prepared to maintain and market their businesses for years, owners have to make a decision. Dismissing a buying offer, during a period of underperformance, can have disastrous consequences if there is no plan to turnaround performance. For an owner that is burnt out and not able or willing to commit to growing the business, accepting a deal that’s 20% below expectations can be the best deal that they can get. Rather than risk further decline in performance and value, an owner can still retire comfortably, while retaining loyal employees, and providing ongoing service to long-term customers.
At Calder Associates, we can confidently say that 99% of clients regret passing up on such a deal because in retrospect it was the best deal that they could get. The best advice that we can give is when a business owner is ready to sell, be realistic about selling price