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When working with business owners interested in selling to a third party, Exit Planning Advisors need to do three things: (1) help owners set goals that will allow them to determine whether an offer from a third party is “good” or “bad,” (2) educate them about the sale process, and (3) prepare their companies for sale.
However, when providing this information to your clients, you may find that some clients become boundlessly optimistic about their sale prospects. This boundless optimism can make your client susceptible to Deal Killers.
What Is a Deal Killer?
A Deal Killer is an undetected or unresolved issue that will destroy any hope of selling a business to a third party. Detecting and neutralizing Deal Killers is an important part of pre-sale planning, which itself aims to maximize profits and help owners achieve their Exit Objectives.
Three Prominent Deal Killers
The following list includes the three most common (and, fortunately, most avoidable) Deal Killers:
Each of these Deal Killers results from overly optimistic owners’ rose-tinted view of their own businesses. While boundless optimism is critical when founding a business, it must be less pronounced when an owner desires to exit the business, since it is often the cause of owners’ tendencies to consistently and dramatically overvalue their businesses.
The most common complaint that we receive from private-equity representatives is that owners vastly overvalue their businesses and then demand unobtainable sale prices based on the overvaluation. This is a waste of owners’ time, effort, and money. Additionally, entering the marketplace with an absurd asking price only to exit when buyers don’t bite can irreversibly damage business value in the future. Thus, it is imperative that we, as Exit Planning Advisors, help our clients accurately value their businesses (with the help of a business broker or investment banker if necessary) to assure that our clients can achieve financial security.
The benefits of guiding owners toward an expert valuation of their businesses is twofold. If the expert agrees with the owners’ valuations of their businesses, then you have provided data-based information at no cost. In the more likely event that an expert disagrees with owners’ valuations, you will have helped owners avoid two missteps: entering the market before the business is ready and not dedicating enough time and money to increase the business’ transferable value, which can prevent owners from meeting their financial needs and wants.
Often, owners who rush into the sale process blinded by overly optimistic perspectives regarding sale price end up spending too much time, energy, and money to realize that their glass is not only half empty but also shattered completely. As Exit Planning Advisors, we must inject a realistic view of the marketplace into owners’ pre-sale–planning mind-sets. Though Exit Planning Advisors know that Exit Planning is a process that can take years of value-building efforts to assure success, owners—who often overvalue their businesses relative to the market—do not. Thus, we must stress to owners that obtaining a realistic valuation of their businesses long before their planned exit date is crucial to a successful exit.
Are You a Deal-Killer Killer?
You have the potential to neutralize Deal Killers before they affect your clients’ sale prospects. All Exit Planning Advisors trained by BEI appreciate the importance of evaluating the mergers and acquisitions (M&A) market consistently, either themselves or with the help of a dedicated M&A advisor. When assembling your advisor team, you must be able to provide your clients with vetted business brokers or investment bankers capable of providing your clients a realistic and accurate business valuation—typically at no cost—before putting the business on the market. This is an invaluable value-added service for owners. Can you provide it?