By Jay Carter
Blind spots put your client’s exit strategy at risk. Discovering and addressing them early can save a transaction and solidify your relationship.
Every business owner has them. They’re nearly unavoidable. But when a business owner is preparing to sell their business, blind spots can be deal killers.
A business blind spot can be anything that puts the business at risk, diminishes its value, makes it unappealing to buyers, or otherwise restricts the owner from achieving their goals, and the owner is totally unaware of them. And, business blind spots can be devastating, especially when they are identified in the middle of an exit transaction.
A recent survey of business owners and M&A specialists reports that in more than 70% of all business acquisitions, at least one unexpected issue arises. We have seen these surprises cost business owners from 15% to 45% of the sale price.
For business owners planning to exit their business within the next 10 years, early detection of blind spots is one of the most effective ways to prevent a failed or disappointing exit transaction.
Fortunately, most of these threats can be reduced or eliminated if they are identified soon enough.
Common Business Blind Spots
There are hundreds of potential business blind spots, but here are five that the MarketView team has identified as common and avoidable.
The Valuation Delusion: Many business owners begin the exit process with unrealistic valuation expectations. That’s understandable. Our clients have spent years, or even generations, building a business they are proud of. And when it’s time for an exit, those owners want the maximum valuation they can achieve. However, we counsel our clients to be pragmatic and realistic. Oftentimes, owners are well into the sale process before discovering that their expectations are not achievable. This forces the business owner to choose between two unattractive options: 1) pulling the plug on the sale process with hopes of building company value and trying again in the future, or 2) moving forward with adjusted goals, and accepting a valuation below expectations. Each of these options is costly, time-consuming, and risky for the business owner. We help our clients avoid both of these scenarios.
The Customer Concentration Trap: Successful small businesses often grow to become successful larger businesses with just one or two great customers. There is nothing wrong with that in principle. The problem occurs when owners underestimate how heavy customer concentrations turn off potential buyers, which can ultimately deeply discount the value of the business. Companies with a single customer representing more than 15% of total revenue need to diversify their customer base prior to launching a sale process.
“Unconventional” Record Keeping: Too many small and mid-sized businesses rely on their own “evolved” system of accounting and financial reporting. This is typically an amalgamation of work from a string of accounting firms, bookkeepers, and office managers. This system may serve the owner’s needs just fine until a serious buyer is reviewing the books. Buyers prefer financial statements prepared in accordance with Generally Accepted Accounting Principles (“GAAP”). In addition, each industry has customary accounting practices and standard financial reports. When a company’s practices are inconsistent with buyers’ expectations, red flags fly. Furthermore, if it doesn’t scare the buyer off, they still need the information, requiring the company to go to the trouble, expense, and deal-killing time to restate financial statements in accordance with their expectations.
This can all be avoided. Before attempting to sell their business, owners should be able to provide 5-years of consistently prepared financial statements and reports, all presented in accordance with GAAP and other practices customary for their industry.
The Assumption Swamp: This is a devastating problem that we see more frequently than anyone might imagine. A typical scenario is that one shareholder owns a large majority of the business (say 80%) and another owner owns 20%. The controlling owner exercises their rights and launches a sale process, before consulting with their partner. Whatever their rationale, the controlling owner makes the incorrect assumption that the minority shareholder will go along with the transaction once informed about it. Understandably, the 20% shareholder is insulted and angry when they find out. We’ve seen buyers walk away from deals and we’ve seen 20% shareholders demand and receive additional compensation for cooperating. Communication and agreement among owners from the beginning of a sale process is an easy blind spot to avoid.
Cold Feet: Business owners get cold feet all the time. It is their business and they have the right to change their minds, but doing so can have lasting repercussions.
In most cases, for owners who change their minds about selling their business, the issue affecting the change existed long before the sale process began. For example:
Selling a family business can be extremely emotional. Much more than a financial asset, the business represents a lifestyle, an identity, and a source of pride. The business is a family member. Owners’ emotions surrounding the sale of a business often outweigh the rationale for selling it.
This is another preventable failure. The owner must be all-in throughout the entire process for a successful sale to occur. To be all-in, the owner must be very specific about reasons for selling, their financial objectives, legacy goals, and their vision for the future.
These are just five of the blind spots we see every day. They can be devastating to an owner who isn’t prepared. Fortunately, each of these blind spots can be avoided. MarketView specializes in helping business owners find their blind spots, and eliminating them, before pursuing a sale.
If you are a business owner and hope to monetize your life’s work with the sale of your business, whether in one year or ten years, please give us a call. For the same cost, you might pay for CPA audited financial statements or a decent business appraisal, we complete the MarketView process, including the delivery of the Baseline Assessment and MarketView Blueprint, all in about 30 days. e do the heavy lifting of this essential work so that you and your team can focus on running your business.
For more information, please contact:
Jay Carter
Founder and CEO
San Diego, California
704-904-7543
jcarter@MarketView.com
www.MarketView.com