CHALLENGE: The owner wanted to sell for a high valuation price, but he was indispensable to the business. The business was mainly him. If he would leave, the business would suffer. There was no key employee that had been groomed by the owner who could run the business in his absence. Buyers can spot that, regard that business as a high risk, and so want a much lower valuation.
The Approach: In researching the business in depth it was also found that the business had good cash flow consistently for years, was in a very good and growing industry, had long-established customers with recurring sales, and a big upside for growth. However, most of the business was with the owner who had all the customer relationships, had most of the expertise knowledge needed for this type of business, and conducted all the financial and administrative duties. So I had to approach the owner with this challenge and propose some solutions.
- Proper advance planning for a sale & making changes that took about 6 months
- Training and delegating duties/responsibilities to 2 key employees
- Offering a deal structure that included the owner to stay for a 1 to 2 year transition, with compensation, to help the new owner be successful
- Offering a creative sale structure that minimized the risk to the buyer, including some partial seller-financing and/or an earn-out.
- Find the right buyer, a strategic buyer that was already in the same industry and had the knowledge, skills, and staff to take on this business without “skipping a beat” and actually able to significant grow the business soon. Therefore, the perceived risk by the buyer was low.
The Results: A sale transaction for a purchase price of 80% of asking, but since this was an asset sale the seller also received at closing additional money for inventory, received his account receivables and payables, and money for works in process (WIP) which meant the seller received a total package of 96% of asking price.