Seller Expectations - The Number One Deal Killer

The number one reason most founders don't sell comes down to the disparity between their expectations and the markets' realities. Understanding what you need from the transaction, finding out how that lines up with the way buyers will value your business, and being clear on your true bottom lines and the right structure can close or eliminate the gap.

The 3 Most Common Deal Killers (guest blog post from one of the CANN firms)

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Video Transcription

Good morning. I'm Kirk Michie with Candor Advisors. Last week's post got a lot of attention, both on LinkedIn and even more so inquiries to our website directly. 

The issue is around essentially the difference between how much cash you, as a business owner, are likely to get at the close of your transaction, and whether there would be structure, which is what deal people call things like seller notes, rolled equity, and earnouts. 

So, to kind of build on that, I want to give the group a little bit of a sense of what the most common issues are, and I'll do it kind of week by week over the next several weeks. 

The first one is seller expectations around value. 

Now your business is a kind of your baby and you may be too close to it to understand how the market values it. But it's important to understand that something is worth what somebody will pay for it, and not necessarily what you think it's worth. 

Now, you always have the opportunity as a seller, even if you engage an investment banker and go to market, to decide not to sell if the marketplace doesn't value your business the way you think it ought to, but seller expectations around value is THE most common problem in most transactions.

There are cures for kind of the mismatch. One of them by structure is to say, well, I as a buyer might think your business could be worth more money down the road, but I don't necessarily think it's worth that today. Because think of it this way, a business is essentially worth what happened in the past or it’s valued based upon what happened in the past or whatever’s happening now financially, the sales, the net income or EBITDA.

There's a multiple of one of those figures that a buyer's willing to pay, and then that number is either increased - there's a premium for what might happen in terms of growth in the future, or it’s discounted for what might be vulnerable to that business to continue to be generate that revenue, income, or EBITDA. And that's how the market values your business.

So, if there’s a mismatch, structure can cure for that. Maybe you don't get as much cash up front, but maybe you get an earn-out, so that, if you hit the targets that you think you'll hit, you get a lot more money down the road. There is some risk to that - you might miss those targets and only get to keep the cash you've got upfront, so you need to walk into that well-advised but that's one way to cure for it. 

Rolling equity in the business is another way to get more value down the road with a new financial partner who might be able to add capital, strategic guidance, operating expertise, and relationships. And then the two of you participate at that second bite of the Apple that gets talked about so often because of the second sale of the business.

So, there's several different structural, solutions for a mismatch between your expectation of value as a seller and what the market might deliver in the way of buyers.