Dodge these common pitfalls that jeopardize your business value.
1. Failure to have an exit plan
I firmly believe that the biggest blind spot is not having goals for the ultimate and inevitable exit. Those who fail to plan, plan to fail. Even if a business owner never wants to sell the business and hopes to pass it on to the next generation or key people, they should run the business as if they plan to sell it. They should have a time horizon, understand their economic needs for the next phase of life, and have goals for the business after they exit.
I recommend business owners engage with an exit planning advisor long before the time they hope to leave the business. I also recommend reading John Brown’s excellent book “How to Run Your Business So You Can Leave It In Style” and following the author’s Seven Step Exit Planning Process.
2. Under investing in accounting professionals and financial reporting.
Not investing in good financial reporting and professional accounting services to produce reliable and verifiable financial statements will result in fewer interested buyers and money left on the table.
To avoid this blind spot, hire a professional accountant to serve as your controller. An experienced accountant (beyond a bookkeeper) will ensure that the financial statements comply with generally accepted accounting principles. A good controller can also provide the data that buyers will demand. Similarly, if the business is large enough, hire an experienced full or part-time CFO to mitigate business risks, provide insights on operating improvements, and advise on significant business transactions. An experienced CFO can create tremendous value and provide access to the capital a business needs to grow and prepare the business for sale.
3. Not understanding the value drivers of the business and the things buyers are really going to focus on.
A few examples of this are customer concentration, vendor concentration, and key employee risks. Other drivers to consider include profit margins by product, and profit by business segment. Working capital efficiency, machine utilization, people utilization, and lots of operating metrics that demonstrate the health are also critical.
4. Not fully understanding your business model and how the market values what you do.
Businesses that command the greatest market interest and fetch the highest prices are those that have recurring or reliable revenue. Business owners should think about how they sell their products and services and, whenever possible, diversify those revenue streams. Valuable transferrable businesses have multiple types of revenue beyond one-off transactions. To scale businesses, you need capital, and the best form of capital is predictable revenue.
5. Staying in business too long.
The most common reasons that business owners exit include running out of time (owner retires), running out of resources (business needs more capital), and running out of interest (business is no longer fulfilling). Have sales conversations early, even if you aren’t ready yet, and know your “number,” which is the amount you’re willing to sell for.
“The biggest thing that will help you or hurt you is whether you’re prepared for the unexpected. That knock on the door where somebody wants to buy your company is not the time to get prepared, that’s the time to be prepared.”
Listen to the episode of Exit Readiness Podcast with Pat Ennis and Walter Deyhle here.
WHAT TO DO NEXT
Seek counsel, explain your objectives, and define where you are in your journey. An investment banker can help determine your best path to secure higher business value. For more details, book a discovery call or connect with me on LinkedIn.
JD Merit is a leading boutique investment bank focused on entrepreneurial middle-market companies. JD Merit executes sell-side M&A, buy-side M&A, capital advisory services, debt and equity capital raises, corporate finance, and valuation services. www.JDMerit.com