When I was in private industry I frequently assessed potential acquisition targets. We would contact those deemed worth pursuing, and assess their interest level. Negotiations would only start if both organizations’ goals were aligned. There was a process of evaluation on both sides; two totally different perspectives on one shared outcome.
A business is only worth what it can make.
Facts must validate value. This, in turn, requires disclosure. A seller will want to know if a prospective buyer is legitimate and can afford the acquisition. A buyer will want details of their prospect’s situation, ranging from financial performance, to key staff and suppliers, to client lists, and so on. And this, in turn, means that before entering into serious discussions both sides should protect themselves with non-disclosure agreements, prior to sharing sensitive information.
As a buyer does due diligence in learning about a prospective acquisition, the hopeful seller will ideally cooperate, so as to achieve maximum value in the sale. The importance of collaboration cannot be overstated; without it trust will break down and evidentiary facts become suspect. This can crush any deal.
Your business’s worth will vary by industry; however in all cases it will be measured on the ability to sustain cash flow. The message for sellers: you must have a positive cash flow track record to attract top dollar—you have to back up your value with performance.
Have a continuance plan.
In the Small Medium Enterprise (SME) market, the question of positive cash flow performance requires the answer to another question: will the sale, and departure of the owner, cause customers to take their business elsewhere? This event would lower valuation. In order to mitigate this risk a seller must demonstrate their business will continue to succeed without them.
In order to preserve value and ensure your exit provides you with the reward you expect, you must put a continuance plan for your business in place. By mentoring and promoting protégés, your business’s future performance can be guaranteed, thus maximizing future exit value.
Fundamentally, your business is only worth what you prove it can make for the next owner. Start your cash flow improvement and continuance plan at least five years before your exit. Be relentless in making your business work without you. This will make it easier for you to leave when you want.
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