Ask Us Anything
Dear Oaklyn Consulting,
I have a friend who is selling their existing business, and they want more than any buyer is willing to pay. Should they take the best terms they can get, regardless of their “valuation,” and ride off into the sunset or wait until the perfect buyer comes along? Is there a rule of thumb, like accepting an offer that is within 10-15% of the asking price? What is reasonable, etc.
PS – The owner is starting to have health issues, and the business is their “retirement plan.”
Thanks.
From Oaklyn Consulting
It is a tough situation when business owners find themselves needing to sell a business rather than reaching the conclusion of a process in which they built a business specifically to be sold.
Once businesses are large enough and can sustain themselves as management changes, there is an actual market for companies in which there are multiple potential buyers active at the same time, and therefore, an opportunity for buyers and sellers to trade the business on predictable terms supported by reasonably transparent valuation analysis.
But for most owner-operated businesses, this isn’t the case. Instead of an active market, there is the opportunity to find a unique potential buyer, persuade them of the benefits of continuing the business, and negotiate a sale on mutually agreeable terms. The difference between this approach and selling in a marketplace is that value is almost entirely subjective. On the buyer’s side, the question is, what are the specific benefits a specific buyer can realize from owning the business? On the seller’s side, the question is, how does this unique opportunity compare to my next best actionable alternative? When the answers to these questions overlap, then there is a deal to be done, and when they don’t overlap, there isn’t.
When we see people really succeed at business sales, they have, counterintuitively, abandoned the ideas of an asking price or a marketplace of buyers. Instead, they have focused on these five questions:
- Who specifically could benefit from absorbing my business into theirs?
- How specifically could this buyer/partner achieve the greatest benefit from a deal?
- How will I create the opportunity to pitch the idea to them?
- How much value can reasonably be created from this business combination?
- How might we allocate the value fairly between the buyer and seller?
Your friend might find it helpful to brainstorm all the possible deal partners who could absorb their business and then back into what characteristics of the future business combination could justify the value needed for them to retire. Then, they will know a little more about what is reasonable to expect in a sale.
