Wednesday, March 21, 2007/
Who wouldn’t buy a business with a recognisably profitable future? There are ways to achieve this.
Build future value
I am continually amazed at how little entrepreneurs know about building value in their business as part of a process of selling their business.
Not that I should be that surprised, having spent many years now educating business owners on how to best prepare their businesses for sale and how to generate a premium on sale.
But the thing that constantly amazes me is the fact that their professional advisers and business brokers know little better.
Fundamental to the sale process is understanding the value that the buyer will extract from the business. Without question, this comes in the future not the past.
That is, the value of any investment is derived from a future stream of income.
So why is it that advisers and brokers force business owners to use past profits to value a business – normally using an industry EBIT valuation model, which is more guesswork than science?
When you think about this a little more seriously, you can see that a business that makes the effort to provide the buyer with a different, more positive, more profitable future for the business being sold should get a higher price than simply a multiple of past earnings.
This can lead to two possibilities – the buyer can extract more from the existing business than the seller, or the buyer can utilise the assets and capabilities within a much larger business, thus exploiting the underlying assets and capabilities much more than the seller could.
Clearly, the process of extracting value is to find a buyer who can exploit the business better than you can. The objective is to create future potential for the business way beyond the current owner’s capacity and capability. By finding multiple potential buyers who can generate greater value in the business in the future than that which could be generated by the current owner, the seller can readily achieve a premium on the sale.
If you are a business owner, you need to break away from the past and concentrate your preparation on what the future of the business might look like in the hands of a much more capable and better-resourced buyer. Then go find those buyers who can best exploit the potential in your business. By setting them up in a competitive bid, you will be able to extract the best price for your business.
However, a word of warning. Make sure your buyer can deliver on the potential – otherwise you won’t be believed and their lawyers will come after you wanting to get the money back because they (and not you) failed to deliver on the potential.
Dr McKaskill, a global authority on exit strategies, is the Richard Pratt Professor of Entrepreneurship and Academic Director of the Master of Entrepreneurship and Innovation, Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne, Australia. He has taught at universities in the USA, Australia, New Zealand, and the UK, and completed his academic qualifications in Australia and the London Business School.