There are many reasons why a business fails to reach the asking price but the most common in our experience is what is known as the impact of “Transferable Value.”
Put simply, the owner is pricing the business based on the value of the business to him, whilst the buyer is clearly going to value the business on what it will be worth to him and the two values really can be miles apart.
So, what is the difference?
Well, there can be many reasons but probably the most common one is that of “Owner dependency” – the fact that the business is currently too dependent on the presence, control and knowledge of the owner. The business can barely run without him there and his constant input.
We recently had a case where an owner of a very profitable growing engineering business was unable to take a well-earned retirement because his business was unsellable!
He was the business, he took all the decisions, handled all customer contacts, bought all the raw materials, ran production, and was involved in every decision taken on a daily basis – and without him there was no business of any value. He had all the knowledge, relationships and no management support. Should he leave all the knowledge and intellectual property left with him.
We managed to help him eventually, but it involved introducing many of the elements identified in our NIAG Saleability document. In this case we helped him build a management team that over time were able to take control of the key day to day activities from production, procurement, financials and sales and marketing and prepare a saleable business that had “Transferable Value” to an incoming buyer.
In this case, the original valuation would be dramatically reduced by the need to employ a key new employee capable of replacing the owner and his wide ranging capabilities – a very expensive additional cost which reduces the profit and of course, valuation.
Once the existing employees were capable of running the business the need for new management was removed and the Company value increased accordingly.
If you would like a copy of the NIAGroup Saleability Document, you can download it here.