Following on from last week’s epistle on business value, I had several requests to help adjudicate in deals which are under way. In two instances the sellers’ auditors had placed values on the businesses, and in both instances the buyers, post due diligence, had some difficulty agreeing on a transfer price with their buyers. While I accept the difficulty such a civilised discussion can elicit in the last days before the seller rides off into the sunset, I cannot help but sigh. There are much better ways of running such events. They are ways which are far easier and less stressful, and which result in less contested pricing agreements.
Let me take you back a few steps, and into another industry. Motorcars. We live in a very consumer oriented society, and most of us renew our cars every three to five years. (Only my most successful clients tend to drive old, working, paid for, adequate vehicles. True story.) So most of us know how to go about buying a car: We go to the show room, compare the asking price to other comparable vehicles we have looked at, and we make a decision. Perhaps we’ll haggle a bit over some or other compromise around mag wheels, fat tail pipes or leather trim. That’s pretty much it.
Of course if it is a used car and a private deal with no dealer, there is more scope for getting a better price. This is because as private sellers, people do not deal in the sale of cars for a living, and they are easily taken, generally speaking.
If I continue the simile through to purchasing a business. Prospective purchasers always ask about the asking price; almost immediately in most cases. I’ve been doing this for twenty years, and there have been few exceptions. Towards the end of discussions there is often some haggling around price and terms. If it is handled properly, it is fairly stress free for the seller. It may not be stress free for the purchaser, but that is not our problem. If I have my way, the stress is all on the purchaser as he competes against other prospective buyers – imagined or real.
The problem comes in most often when a competitor, supplier or customer walks through the door and announces that he wants to buy your business, unsolicited. These guys almost all follow the same modus operandi: They listen to your glowing reports about your baby, ask a few innocent questions, including “what sort of price are you asking for?” No matter your answer, you will be placing a ceiling on the price, and you can be sure that it will be progressively lowered as the prospective buyer, through his auditor, systematically lowers your expectations.
Your weakness? The buyer has no competition in the deal. He raises and accommodates your expectations to start with. You get the fever. You talk excitedly to your spouse every evening. You plan your future. Then his auditor starts to carve away at those dreams. You get defensive, and a little gatvol. Through this process your prospective buyer has had unfettered access to all sorts of details regarding suppliers, customers, accounting policies, marketing plans…. argh… the blood runs cold.
How much damage is being done?
There is a better way. I contend that every business owner should always know what his business would fetch on the open market. How else can you plan for the future? How else can you negotiate meaningfully?
Further, every business owner should always have certain information available for prospective purchasers which does not lay bare the soul of the business. You should have prepared strategy for dealing with unsolicited and flattering advances from trolls looking to abuse you and your business, and leave you flat and violated. Well perhaps it will be a nice short love affair, but that would be the exception. Experience has demonstrated something less pleasant is more likely.
- If you don’t know the value of your business, you cannot develop a BATNA (Best alternative to a negotiated settlement).
- If you don’t know, in advance, the value of your business, you may spend weeks arguing over a deal that could never happen.
- If you don’t know the value of your business, you might be planning right now to exit something which in reality cannot realise enough for your other dreams.
- If you don’t measure it (know the value) how do you control it?
Take some time over the coming holiday period to plan your future with some facts at your finger tips.