Exit Planning Mistake 4 – Not Knowing What You’re Selling

By Generational Equity

07/27/2016

Some of you reading this title might be scratching your heads, thinking, “Of course I know what a buyer is buying when he/she acquires my company. They are getting my (fill in the blank)!”

Ultimately you may be right and have stumbled upon the answer to the most important question facing any business owner looking for a buyer for his/her business: What features will ultimately attract the optimal buyer to my business? However, in our experience, it takes a savvy, experienced M&A professional to understand the motivation of a buyer.

This piece, though, is a fourth in our series on miscues to avoid, assuming you are trying to find a buyer without professional M&A advice.

Management and sales guru Peter Drucker is widely credited with summing up this mistake quite nicely several years ago:

"The buyer rarely buys what the seller thinks he is selling." Peter Drucker

Although this applies to sales/marketing in general, it is applicable to the sale of a privately held business since there are usually so many intangible assets involved in the transaction.

What is an intangible asset (a.k.a. off-balance-sheet asset)?

These are items that make your business unique but usually are not on your balance sheet because they cannot be financially accounted for as a typical asset like a truck or piece of equipment that you use on your shop floor. However, quite often, it is these intangibles that provide your business with tremendous value in the eyes of specific buyers.

A Sample of Intangible Assets

Here is a list of intangibles for manufacturing entities that I created several years ago (every industry has its own):

• Backlog: is the buyer acquiring a business with planned revenue streams based on booked orders?
• Branding: does your business have an established, recognized brand?
• Computer Software: have you developed proprietary software?
• Contracts: does your company have any short- or long-term contracts with existing clients (in writing)?
• Credit: is the buyer acquiring a business with established excellent credit with all vendors?
• Custom Designed Factory Floor: have you designed unique, proprietary manufacturing processes for your company?
• Customer List: is the buyer purchasing a blue chip customer list?
• Customer Relationships: does your company have long-term relationships established with its clients?
• Customer Testimonials: what do your clients say about the business?
• Distribution Network: is the buyer acquiring an established network of distributors?
• Dominant Market Position: is your business a clear leader in the market?
• Employee Manuals: do you have established training and development programs?
• Environmentally Friendly: is the buyer acquiring a company that operates a “green” manufacturing facility?
• Established Staff: do you have an employee base of long-term, tenured personnel?
• Formulas/Trade Secrets: have you developed any proprietary formulas or trade secrets for the business?
• Government Programs: are you part of any local, state, or federal purchasing programs?
• Growth Potential: is the buyer acquiring a business with above-average growth potential? If so, why?
• Internet Presence: does your business have a well designed website and solid web recognition?
• ISO Standards: is your company in compliance with any international ISO standards?
• Management: is the buyer purchasing a solid management team that is not dependent on the owner?
• Patents: does your company have any patents?
• Procedural Manuals: have you created documented procedural manuals for employees to follow?
• Product Uniqueness: is the buyer acquiring a company with products that are unique in the market?
• Production Equipment: even if fully depreciated, does your equipment have value to a buyer?
• Profitability: is your business more profitable than industry norms? If so, why?
• Proprietary Production Processes: have you developed any proprietary production processes?
• R&D: is your business investing in product development/improvement to remain competitive?
• Security Clearances: is the buyer purchasing a company that has employees with security clearances?
• Skilled Employees: do you have any employees that have earned industry recognition?
• Solid Supplier Base: have you developed a base of solid, assorted, dependable suppliers?
• Systems and Procedures: is the buyer acquiring a company with documented systems and procedures?
• Technology: are you using leading-edge technology in your business?
• Tooling: have you developed proprietary tooling used in the production process?
• Trademarks/Copyrights: is the buyer purchasing a company with trademarks or copyrights?

Some CPA types will argue that each of these is already factored into the value of the company because many of them are needed just for the company to generate the revenue and profitability that it now does. They tend to downplay the role of intangibles a bit, since they believe that they are technically already factored into the valuation equation via the projected earnings of the company going forward. On one hand, they are fundamentally correct. Many of these intangibles are literally why you are still in business.

However, what we have seen time and time again is that specific buyers will see the off-balance-sheet assets of a company and make the calculation that under their management one or more of these could be even more valuable than what is being shown in the company’s current pro forma.

For example, a company located on the East Coast but with no presence on the West Coast could look at a business in that region and realize tremendous upside. Likewise, a manufacturer with no rail spur close by could see that you have one next door, thereby reducing shipping costs dramatically, as a significant intangible asset. Finally a company with a great product, but a weak marketing and sales staff could look at your stellar sales performance and marketing team as a valuable asset to add.

These are just a few examples. The history of M&A is littered with buyers who were able to make a killing off an acquisition simply because the seller(s) had no idea just how valuable their company was based on a few of these intangibles being present. Don’t make that same mistake. If you are looking for buyers without professional help, do your research and analysis. Find out which buyers are active in your industry. What are they specifically acquiring and why? Then honestly analyze your company and see if it has any of these features that are sought after. If so, you may be sitting on an intangible goldmine.

Of course, we suggest that you avoid the second mistake we covered in this series: Trying to find a buyer without professional M&A guidance.