Thinking Like a Buyer and Succession Planning

By Generational Equity


I recently attended a webcast entitled “Succession Planning for Closely Held Business Owners” hosted by Expert Webcast and sponsored by Anton & Chia, LLP. The webcast’s focus was just as the title implies – the importance of effective succession planning for owners of privately held companies. Although the panelists made a number of good points on how important this topic is, one thought they raised really struck me as most valid:

  • The most important issue for a business owner to tackle when considering a succession event is to objectively view the company as a buyer/new owner would.

Although this concept seems intuitive, it is truly remarkable how far too few business owners follow this admonishment. And it applies to nearly all succession events (unless you simply close the doors and sell off the inventory), but especially any transition to a third-party owner.

Why? Because most business owners are far too close to the day-to-day operation of their businesses to objectively examine, without some help, the positives and negatives of the company with a critical eye.

Most business owners err in either one of two directions:

  • Being far too critical of the deficiencies of the company to see any positives OR
  • Being overly optimistic about the possibilities of the business to adequately address areas that might cause new ownership concern.

The first instance is most often seen when owners are simply burned out from running the entity and are tainted by the daily issues they must deal with to see the possibilities of where the company can go under new owners.

However, by far, most business owners fall into the latter group, being too close to the “positive” aspects of the company to truly see the areas needing improvement that might concern buyers. We encounter this all too often when working with our clients and interacting with many of the attendees at our M&A conferences.

Let’s look at a few of the most common blind spots that cause a deviation in value (DIV) from a seller’s point of view and a buyer’s outlook on a company: customer concentration and owner dependence.

These are actually two areas we have discussed before as they tend to be two of the most common issues causing DIV that we see.

Customer Concentration

From a seller’s view = The fact that 20% of our revenue comes from one client and that 50% of our revenue comes from the top 4 is a positive. Look at how tremendous we treat our customers. They have been with us for years and are loyal and continue to purchase from us because of the great service we provide.

From a buyer’s analysis = If these four clients disappear after the deal closes, we lose half our revenue and most likely even more of our earnings. What are we buying if that occurs? What good is the history of these relationships if they disappear overnight? And are we giving away our product to retain these relationships? (Underpricing is a common issue we deal with.)

Do you see how different the perspectives are? A buyer, looking at the same set of facts, can and will come up with a much different valuation of the company than the seller will; hence the deviation in value.

Owner Dependence

From a seller’s viewpoint = I have grown this company from the ground up! I have received industry recognition and accolades. I have become an expert in our field and because of this, the business has grown and prospered.

From a buyer’s eyes = Where is the middle management? Who is ready to take over the key role that the owner has created? Is anyone outside of the owner even known by the key clients? Who has the name recognition, the business or the owner? If we ask the owner to provide us a list of key employees and their roles, can he/she do so?

Again, same set of circumstances but far divergent views of valuation issues.

That is why it is critical for business owners to develop the mindset of a buyer when considering the transition of their company to any third party. You literally need to dissect the entire operation, every department, every team and ask, how would a buyer view this?

Having said this, recognize that this is not an easy thing for business owners to do, especially those who have been running the business for quite some time.

To accomplish this goal, we highly recommend that you take the time and invest the capital to hire an M&A consulting firm to guide you. Look for a team that has extensive experience in not only closing deals but also working successfully with owners of private companies. The reality is entrepreneurs are the HARDEST folks do deal with when it comes to being honest with them about the deficiencies in their businesses.

As Warren Peck, the owner of Phoenix Rising Aviation told me when I interviewed him after his deal closed, “No one likes to be told that their baby is ugly.” We told him this after our evaluation was completed, but in the end, we also found a great buyer for his business. Our honest evaluation helped him to bridge the DIV gap between what he thought his company was worth (priceless) vs. how buyers viewed his company (great business, lots of potential, just needs some improvement in key areas).

This is why the first step with our clients is a full business evaluation by valuation professionals. This 60- to 120-day process allows us to ask the hard questions that buyers will eventually be asking. It also allows us to give the owner a range of values to expect in the market and most importantly, via our Roadmap for Enhancing Value, we give the business owners concrete areas to focus on to improve their value, even while we have them in market.

Even though our team is comprised of brilliant valuation professionals (we were awarded Valuation Firm of the Year in 2020 by the M&A Advisor), the steps most business owners need to take to close the DIV divide are not rocket science. Generally speaking, if you can begin to take steps the following steps, you will be making great strides in bridging any valuation gap between your expectations and the buyer reality.

  • Reduce owner dependence
  • Improve customer concentration
  • Enhance profitability
  • Augment sales and marketing teams and processes
  • Reduce customer and supplier churn
  • Document key internal procedures and policies (this idea is anathema to most business owners but it is critical to do as your business grows)

My question to every business owner is this: Can you objectively (without emotion) substantially review the operations of your business the way a buyer will? If the answer is no (now be honest), then hire Generational Equity to work with you on your exit planning process.

Carl Doerksen is the Director of Corporate Development at Generational Equity.

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