Will A Buyer Pay for Past Performance or Future Projections? / by Kerri
When you want to get out, do you look at past performance or the future potential of your business? Too often, business owners erroneously assume that a buyer will want to buy the business based on past performance. Buyers go through due diligence specifically because they want to know what the business can deliver moving forward after you get out.
To add perspective, let’s compare both scenarios:
Getting Paid for the PAST
There are three core elements to selling your business:
- When you sell your business
- How you structure the transaction
- The business valuation itself
You deserve to be paid for what you’ve built. You stand on your past performance. But that’s not the same as preparing the business to be buyer ready so they see the full value of the business as it stands now and what the future could hold. Only when you make the business self-sustaining without your personal operational control each day, can your buyer see what the business itself can do. Unfortunately, without that preparation, in many private company transactions, there are stories of 75% of sellers leaving up to 75% of value of the business on the table.
Getting paid for the FUTURE
Informed and interested buyers do exist at all levels. They actively seek out smaller companies for a range of reasons (e.g., to increase their earnings and competitive position within their marketplace), all based on the projected ROI. As the seller, it’s up to you to demonstrate your company can deliver that ROI looking ahead, not backwards.
Unfortunately, it’s far too common for inexperienced sellers to negotiate the sale of their company based on historical performance. While that historical performance is important, it is not the driving factor on which the buyer will base his decision. Rather, buyers are all about the future earnings and potential growth of the company. Their future ROI not your past success is most important to the buyer.
As a basis for business valuation discussions with any buyer, it is essential to use realistic future cash flows and earnings of the business. For buyers, the future potential of an acquisition is far more important than its past performance.
To be a successful seller, you must recognize that buyers will not pay a premium for past financial performance. Instead, they seek to maximize the value they can gain from your business in the future. That’s what you must sell them.
Selling to the Wrong Buyer
Often, private companies will sell to professional or personal acquaintances, including employees, family members or competitors. However, these sellers fail to recognize that buyers often come from unlikely sources, locations or industries.
Acquiring buyers do exist. They actively purchase companies to sustain earnings growth. Sellers who fail to retain an advisor often forego the opportunity to engage a selection of optimal buyers.
There are still other risks in selling your business:
1. Selling at the wrong time
Timing is everything when it comes to selling your business. Selling a business at an inopportune time is one reason too many sellers leave significant money on the table. Key factors when considering timing your exit include the economy, the market, interest rates, as well as the impact of tax and regulatory constraints.
2. Structuring the wrong deal
Inexperienced sellers easily become fixated only on the purchase price while neglecting the importance of overall deal structure and the full range elements and outcomes. Taking the time to creatively structure the deal around all your needs and preferences as the seller will expand options to generate the maximum value you while minimizing tax liabilities.
When you plan ahead and plan early, you can ensure that no money is left on the table when you sell your business.