How Setting Clear Goals Minimizes Value Gaps in a Sale

When it comes to the sale of a business, determining its value can be a complex undertaking.

For a buyer, value is in the future and is almost always driven by financial considerations. It is represented by the likely return (discounted by the risk) associated with the purchase investment.

On the sell-side however, value is often much more complex and reflects the past. But it is more than the financial return received for the investment an owner has spent starting, financing, and growing a business. Here, value can be defined as the sum total of all the elements that create satisfaction for the seller at the time the business is transferred to the new owner(s).

Value can be a deeply personal thing because it depends on motivational components that distinguish what is uniquely important to the seller. It is a function of a multi-dimensional set of beliefs, which may or may not even contain financial considerations. Value is maximized when owners have achieved their purpose in the sale and have no regrets in the outcome. They are confident that the path they have chosen has a strong linkage to their value based goals. Not knowing all the elements that influence a particular path or how they interact can dramatically influence the number and size of the gaps that impact the seller’s perception of value received in a sale transaction.

The very first question any owner should answer when considering a sale of the business is “What are my goals?”

Without solidly defined and thought-out goals, there is significant uncertainty in achieving value from a transaction. As the Cheshire Cat in Lewis Carroll’s Alice in Wonderland points out, “If you don’t know where you are going, any road will take you there.”

For goals to be effective, they must be actionable, precise, concrete, real, and in writing. Otherwise, odds are the seller will end up in a place where he or she doesn’t want to be. This reflects poorly on the  trust and credibility of the seller, results in a significant lost investment of time and money, and causes frustration and disappointment for everyone involved. Establishing goals that reflect value and an appreciation of the path toward success can eliminate that problem entirely.

The steps along the path necessary to achieve a seller’s goals can take considerable time and energy to achieve. For example, if an owner wants to transition the business to the employees through an Employee Stock Ownership Plan (ESOP), the attractive tax advantages of this option are only available if the company is legally structured as a C-Corp. To change from an LLC or partnership designation can take years to accomplish. Handing the leadership over to a family member or existing management can be risky if the new leader is not experienced enough to successfully manage the business going forward. Here, a solid succession plan might be required and can take years to implement. Even trying to transfer a portion or all the business to an outside investor without minimizing the risk factors (e.g. sales concentration, strength of management team, impact of the economy, etc.) will influence the amount the buyer is willing to pay. The time and energy involved in getting a company’s financials ready for an IPO (Initial Public Offering) can be quite challenging. Fixing these gaps between where the business currently is in reality and where the owner wants (needs) it to be can be time consuming — but they are necessary in order to achieve the seller’s objectives.

The transfer of a business is driven by the motives of the seller. Fatigue, health, competition, additional investment, technology, government regulations, economy, family issues, funding a retirement or new venture, and needs of the employees can all play a role in an owner’s motivation for a business sale. These motives are influenced by one or more of the following situations:

• the conditions of the capital markets,
• the state of the business, and
• the personal situation of the owner.

Understanding their influence on the readiness of the owner to pursue a transfer process is also key to setting a appropriate seller goals. The seller’s motives determine the best path or channel to achieve his or her goal and a specific method of execution provides an implementation mechanism. Rob Slee, in his comprehensive treatise on “Private Capital Markets” illustrated the relationship of how these factors influence seller goals on the entire spectrum of implementation options are shown in the chart below:

As shown in this diagram, selling a business can get quite complex. There are multiple motives, transfer channels, and transfer methods. All are governed by various rules and authorities that set them. Owners need to understand how these influence their chosen path to efficiently achieve full satisfaction in a business transfer.

Learning how to navigate effectively through the resulting maze of limits, barriers, and conditions can be a daunting task for any owner who is concurrently managing a company while engaged in a business sale process. Skilled advisors can contribute considerable insight and experience to minimizing the multitude of barriers that are inherent in the steps along the way.

Starting and growing a successful business is the dream of an entrepreneur. But taking action to sell the business without sufficient forethought will lead to a nightmare. Getting the right advisor early in the game can avoid serious value gaps for the seller and answer the question: “If you could have seen the road from the beginning, would you have chosen a different path?”