Studies both locally and internationally are consistent in the finding that only around 20% of businesses that go to market end up successfully getting sold.
The end result of this in most cases is a belated re-planning of how to exit one’s business and, often, a delaying of retirement. From the research, it would appear that owners are far too busy “in the moment” of running their businesses, rather than in the reality of how to interest a future buyer.
Studies also reveal recurring themes that are consistent in mitigating against a sale. Lack of any sort of plan, even with retirement looming, is widespread among business owners and only about 1 in 10 actually has a plan on paper.
Similarly, few seek out the advice of professionals. While there is a common stated aim of “maximising the sale price” (to fund retirement) less then half of owners actually know what their business is realistically worth or have ever had their financials audited.
While many owners of businesses understand the rationale of a management buy-out, the psychology of this is very often self-defeating: 3 out of 4 don’t believe the business could succeed without them. In many cases this may be true but can simply reveal a common reluctance to recruit and develop top managerial talent.
Because owners have the natural inclination to value their businesses on projections (and buyers, by contrast, on actual cash generation) one way of bridging the gap is the so-called “Earnout”.
An earnout is actually a way of the seller “proving” a value to a buyer, over an agreed time frame. Typically, the purchase price is partly paid up front with the balance subject to future performance criteria being met. Earnouts are a popular way to arrive at a deal but can be deceptively difficult. What may appear simple, such as the exact on-going role of the current owner, can turn into a complicated and awkward working relationship, on both sides.
The possible permutations involved in an earnout buy-sell arrangement mean that it’s definitely something which requires the input and facilitation of a professional.
When one looks at the research, the most important learning for sellers is that preparation and planning is everything, including of course the most scientific determination possible of the value inherent in the business.
Whether you’re a buyer or a seller of a business, big or small, contact Nolands Capital to get the ball rolling in the best direction possible.
DISCLAIMER: The material and information contained in this article is for general information purposes only. You should not rely upon the material or information in this article as the basis for making any business, legal or other decisions.