Selling a business: the perception gap

So you’ve worked hard and built a successful, profitable business that has happy employees and which would make a great addition to anyone’s business portfolio….or have you?

When you are selling your business the question that needs to be answered is not; how good is my business? Instead, you need to answer the question; how good will any potential buyer perceive my business to be?

How a buyer perceives your business may be very different to your own view. This is particularly true where you are selling to a larger organisation. If you are selling to a PLC then the perception gap will be even bigger.

Why is the case? After all, you have a profitable business in a sector your buyer either works in or wants to start working in. The perception gap exists because buyers always see a business purchase as taking a risk. Consequently, one of their main drivers in any acquisition is reducing the level of risk. This risk adverse mentality means buyers always see risk in areas where you don’t. For instance, customers that always pay but take their time in doing so or long standing, but informal, trading relationships with major customers. No risk there, right? After all, the debtors always pay and you’ve been dealing with X Ltd for 20 years and they always honour their word so there is no need for a written contract.

The buyer’s risk adverse mentality means they are not likely to regard debts of 60 plus days as good debtors and they are quite likely to say that without a written contract there is no certainty that your big customer will continue to trade with the company after completion. The upshot of such attitude is that a buyer may discount such debtors and possibly disregard the profit from informal relationships. If they do the perception gap widens as the buyer may see a potentially big hole in the company’s profitability.

How then can you close this gap? Preparation is the key. You need to take advice from those that have been through the process before and you need to start early. The maxim “…failure to plan is planning to fail….” has never been more apt than when selling your business. The truth is, if you don’t start planning your exit early you will get less for your business. Why, because you won’t have dealt with the areas where a buyer sees risk and they will look to mitigate such risk during the deal process by paying less.

So what areas do you need to look at before the company is put up for sale? Some key areas – all of which I will deal with in future blogs – are:

• Certainty and repeatability of income – they need to be reassured on your numbers;
• Liabilities and how they’re mitigated – they don’t want unforeseen costs;
• Key assets and how they’re secured – they need to make sure what they’re buying works and or won’t disappear; and
• Key people and their importance to the company – your people are often your biggest asset – they need to make sure they won’t cause trouble and or that they’re tied in.

So if you’re thinking of selling beware the ‘Perception Gap’! It can be closed but it will take some work, future planning and the taking of good advice.