Three different business owners recently described a common problem.They were nearing retirement age and had developed profitable businesses with long-term creditability with their customers.The problem is that each of the businesses attracted the customers primarily because of the owners and not just the business.One described that customers come to him rather than his competition because they choose to select Picasso over other artists. This consideration translates into the owner being the draw to the business and potential loss of business if the owner was no longer there.The discussions relating to the other two businesses were similar, although, one of the businesses had the problem that the owners did not realize that they were the draw rather than their business.
Why is the customer allegiance to the owner a problem?When trying to sell a business, the value to the acquiring business is a combination of the customer base and revenues. The revenues and customers in these cases are highly dependent on the owners remaining.Sell the businesses may not allow the acquirer to add much of the clientele from the outgoing owner.Trying to establish the valuation of the business that is for sell is complicated in that the selling owner sees large revenues and great business prospects.The acquiring company sees the owner as the business and is uncertain as to whether any new revenue will be added post-acquisition.
There may be a solution, but it requires some innovative and different type of thinking.The following are a few considerations that may help provide the exit and business increases needed to make the deal work.
- Hire Manager: Finding a great person to run the business and training them may allow you the best of both worlds. You retain ownership of the business and teach the business to the new hire. It is possible the new person could ultimately acquire the business or simply run it until someone else takes over. You may retain business earnings, but the sale of the business will take time. The new hire(s) may be able to become the face that brings customers and, if they hang around in an acquisition, perhaps an acquiring company can make that work. Make sure you provide the appropriate incentives to keep the new people in the company until an exit is available for all parties.
- Merge with competition: The Picasso type may be able to find other businesses to merge with to build a stronger presence. For example, working with the new merged companies may provide professionals in similar situations to yield a more attractive new business with Picasso, Michelangelo, and Leonardo Da Vinci. The combined business may still require adding new hires to develop a premier business with offerings that will continue to attract customers after the owners depart. However, the owners may be able to stagger their departures without damage to the business. In addition, it may be possible the combined businesses will be worth much greater than the simple sum of the parts.
- Add new offerings: New product offerings can benefit most businesses. Sometimes new products may be premium priced. You may sell less, but make more money. New offerings may allow the business to become more viable post loss of key owners. The transition from a personal relationship to a product relationship will take time. Plan the transition and be prepared to provide the required diligence to execute the plan properly.
- Buy competitors: One favorite of some businesses and investors is acquisition of competition; sometimes referred to as a “roll-up strategy.” This is especially interesting in highly fragmented business sectors where a larger organization can result in reduced overhead and better delivery to the market place. The increasing valuations eventually may result in an exit via acquisition by a larger company. Certain investors are very willing to participate if the strategy and management pass the review. This is similar to the merger concept, but the plan may require a financial group to help fund the roll-up and eventual sale of the aggregate.
You can follow Taffy Williams on Twitter by @twilli2861 and you can email him with questions or contact him via company contact info in the website. More Startup information is contained in his personal blog.