Educating your Seller
January 26, 2021
by a professional from Trinity College Connecticut in 101 Federal St, Boston, MA 02110, USA
It strikes me that one of the great challenges of buying a small business is that you are dealing with an uneducated counterparty. I don’t mean in terms of where they went to school, but in terms of the deal and the value of their business. According to a 2013 State of Ownership Readiness Survey (SOOR) nearly 2/3 of business owners are not familiar with all their exit options. When asked “What best describes how you are planning to transition?” Owners plans for transition, based on the 2013 SOOR were as follows:
- 36% indicated they would transition via an internal exit option
- 31% indicated they would transition via an external option
- 31% indicated they were not sure, and
- 2% answered “other”
The sellers don’t even know the options! Most of their information comes from their neighbors and friends, they don’t have a clear sense of what terms lead to higher or lower prices and what they can do to increase the price of their business and how long it will take.
- 50% of business owners want to transfer their business stock to their heirs. Is this even possible for the seller you are talking to?
- Have the sellers ever completed a valuation? Do they know what affects the multiples or the adjusted EBITDA number?
I would be curious from this community if you felt like the numbers from 2013 still hold or if they have changed. Which sellers have expectations most closely aligned with reality?
in Tampa, FL, USA
The first case - the seller was just planning on selling their equipment and land before closing the doors on their upcoming 73rd birthday. Here again, not well read into what the process looks like or how it is structured, the seller is really just basing their desired price on the value they believe they could get for their assets.
The other case - the seller really had not thought about selling to anyone other than their son in 3-5 years. But as we talked it became apparent to both myself and them that the son was not very interested and our conversation became a bit more meaningful from that point on. But to your point about not clear on how to value their company - the seller (commercial construction management) asked what was the price I would pay based on his website, articles in the local paper, and overall community reputation. Nothing about EBITDA, profitability, or Revenue was even considered from their end on how to think through a proper valuation.
from The University of Chicago in Chicago, IL, USA
I also make sure CPA/attorney are in sync. Very often, I have to educate them to market reality.