If your business has unrealised potential – in the right hands –underlining this fact can work in your favour. By TOM McKASKILL.
By Tom McKaskill
If your business has unrealised potential – in the right hands –underlining this fact can work in your favour.
Any premium paid above conventional value for a business is being paid to cover the unrealised potential in the business. The reason why this is not already built into the value of the business is that it will require the buyer to exploit this potential. That is, the potential will only be realised by the buyer and not by the current owner.
The essence of this argument is that the buyer will need to bring something new to the business, such as new funds, energy, knowledge and/or synergistic relationships and so on, in order for the potential to be realised. If this is the case, why would the buyer pay for something that only they can realise?
Almost without exception, professional advisers will tell you that buyers will not pay for what they bring to the enterprise. At best, they are only willing to pay a fair value for what the business, as a going concern, can produce.
Look at this from the buyer’s viewpoint. Let us imagine that I am smarter than you and that I have worked out how to increase the growth rate of your business to double what you, the vendor, are currently achieving. I should be able to buy your business on the basis of your growth rate, make the changes, and then benefit from the increased rate of growth that I can achieve.
Any subsequent increase in value surely must be mine since you, the vendor, were not able to do this previously. Without a doubt, this latter position will be heavily supported by knowledgeable buyers.
If I as the vendor were unaware of how to extract future potential out of the business, I would certainly not expect any buyer to pay above the conventional going rate. But what if I knew exactly how the business could be exploited, and therefore knew that the business would be worth a lot more in the hands of the right buyer?
My challenge would be to try to extract part of that future value for myself. The critical point here is that, if they don’t buy, the buyer does not get the opportunity to extract the additional value. Thus what I need to do is to hold off selling until the offer price goes up, or get the business into a competitive bid so that the buyers are forced to bid up the price is order to be the successful acquirer.
The smart vendor works out how the business could best be exploited and lays the foundation for that before the sale. They then identify those potential buyers who can best exploit the potential in the business and bring to their notice the possibilities that might accrue to the successful buyer.
Finally, they put the business into a competitive bid to ensure that the buyers have to compete for the opportunity to gain the additional value. While it is unrealistic to expect that all the potential will be passed back to the vendor, sufficient will to result in a premium on sale.
Tom McKaskill is a successful global serial entrepreneur, educator and author who is a world acknowledged authority on exit strategies and the former Richard Pratt Professor of Entrepreneurship, Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne, Australia.
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