Selling a business is a monumental decision involving far more than just agreeing on a final price. While the allure of a high valuation can be tempting, it’s crucial to recognize that the true value of the sale is a combination of the enterprise valuation, the terms of the deal, and the deal structure. The team at Exit GM has considerable M&A experience. In addition to advising hundreds of transactions for sellers, the team at Exit GM has also executed hundreds of transactions as the buyer, and are well versed in how a transaction can be structured.
We always shoot for the best of everything. Focusing solely on the enterprise valuation or EBITDA multiple can be misleading. We know an investor who has acquired more than 100 businesses with his one capital who tells sellers, “Your valuation, my terms”. If maximizing the financial outcome is the goal, Exit GM can accomplish that, but sellers don’t just roll over during negotiations, getting to the ultimate outcome usually requires a bit of horse-trading. Before going to market it is imperative to have a strategic plan that considers the full scope of the transaction to ensure targeting a favorable outcome aligned with the ultimate blend of all components.
1. The Enterprise Valuation: More Than a Number
The enterprise valuation represents the overall worth of the business. It’s an essential component of any sale, but it’s not the whole picture. Valuation takes into account factors like financial performance, EBITDA, market position, and growth potential. However, a high valuation doesn’t automatically equate to a profitable sale.
Why It Matters:
Subjectivity: Valuations can vary based on who’s assessing them. Different buyers might value certain aspects of the business differently, leading to fluctuations in the perceived value. Most buyers base valuations on EBITDA and calculation methodology can vary. Having an experienced sophisticated representation helps even out the methodology and presents a clear analysis of all offers.
Expectations vs. Reality: A lofty valuation might set unrealistic expectations and could lead to prolonged negotiations or a deal falling through if the price isn’t supported by the terms.
Potential Errors: About one-third of the time we see high outlier offers. While this may seem great, and it certainly may be, it is prudent to ask the question of why. Does the high outlier misunderstand a key component of the business? Did they miscalculate EBITDA in some way? It is also a possibility that the high outlier has the correct EBITDA calculation and the other proposals made an error. Having a skilled and experienced advisor is help navigate this scenario.
2. The Terms of the Deal: It’s Not Just About the Price
The terms of the deal outline how the payment is structured, which can significantly impact the actual value you receive. A high price with unfavorable terms could end up being less beneficial than a lower price with more favorable conditions.
Key Considerations:
Payment Structure: How much of the sale price is paid upfront versus in installments or performance-based earn-outs? High upfront payments are usually preferable, but they’re not always achievable.
Contingencies and Earn-Outs: If a significant portion of the payment is tied to future performance, you could be on the hook to stay involved longer than you’d like. This can affect your plans and peace of mind.
Upside Earn-Out Opportunities: Sometimes a good option is to negotiate additional performance-based consideration. This can bridge any perceived gaps, and increase valuation for the seller while protecting the buyer. However, details matter very much to avoid surprises and potential battles later.
3. The Structure of the Deal: Protecting Your Interests
The structure of the deal encompasses the legal and operational framework of the sale. It includes aspects such as tax implications, warranties, and post-sale involvement. The structure can have far-reaching effects on your financial well-being and your role after the sale.
Important Aspects:
Tax Implications: Different structures can lead to varied tax consequences. A higher sale price might not be advantageous if it leads to significant tax liabilities. Adjusting when considerations are paid can impact how much is ultimately kept.
Post-Sale Obligations: Some deals might require you to stay on for a transitional period, which could affect your retirement plans or other business ventures. Staying on board will mean incremental compensation for the seller and provide a negotiating angle for the sellers since this reduces the post-sale risk for the buyer.
4. Balancing Price with Practicality
In many cases, a higher price might come with strings attached. For instance, if the deal includes a substantial earn-out clause, you could end up needing to manage the business for several years to fulfill the terms. This extended involvement can be particularly challenging if you were hoping to move on to new ventures or enjoy retirement.
Considerations for a Balanced Deal:
Evaluate Cash vs. Equity: A high valuation might come with a lower immediate cash payment but more in equity or earn-outs. Assess whether the trade-off is worth it. Understanding the type of equity, the potential to lose the equity, and what are the inherent upside opportunities and the potential downside risks of the equity.
Negotiation Leverage: Use an understanding of the full deal structure to negotiate better terms, but it is key to know what is desired to appropriately assess what is “better”. Sometimes, accepting a slightly lower price with more favorable terms can be more beneficial in the long run, depending on the goals of the sale.
Conclusion: Holistic Approach to Selling Your Business
Selling a business isn’t just about negotiating a high price. Truly gauging the value of the sale requires consideration of the entire package—the valuation, the terms, and the structure. A well-rounded deal will balance these elements to meet the seller's financial goals and personal needs.
Before finalizing any sale, consult with financial advisors, legal experts, and other professionals such as Exit GM to ensure that all aspects of the deal align with your long-term objectives. By focusing on the comprehensive value rather than just the sale price, you can secure a deal that best fits your plans and delivers true satisfaction from your hard-earned success.
About Exit GM
Exit GM is a concierge M&A advisory firm that specializes in assisting business and healthcare entrepreneurs.
Exit GM levels the M&A playing field for moderate-sized business and healthcare practice owners seeking to maximize the value of the most important asset. Exit GM supports entrepreneurs to excel on the M&A playing field, whether it is through transacting with a strategic investor, a financial partner, or acquiring additional locations.
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