How to Exit Your Business Profitably

The most important skill a business broker needs is the ability to give prospective clients accurate advice on the ‘price’ that the client’s business is likely to achieve in the market.

Yet, it is probably the weakest skill present in most business brokers, and often the major reason why the sales process for your business fails.

This is because it is vital that we understand the relationship between ‘return and risk.’

They are the same, however, they are interpreted differently by buyers and sellers.

Risk

Most business advisors focus on risk.

‘Risk’ is about not receiving the earnings (profits) expected, on time and without default. By default, we mean that profits are delivered in full at the time they were expected. So, if profits are not as expected, then there is a default.

Example:
The high-quality freehold accommodation business offered for sale for a million dollars with the amount of net rent received at $100,000 representing a 10% return.

10% is also the risk associated with not receiving the anticipated $100,000 annually. There is a 10% chance of default, either in the amount due ($100,000) or in the timing when it is due.

Return

Most business advisors working with a business owner, or a business seller will use the word return.

‘Return’ in a business (or anything else for that matter) is about buying a stream of future earnings (profits). Return is usually expressed as a percentage of the funds invested. 

Example:
A high-quality freehold accommodation business is placed into the market for one million dollars offering a ‘10% return’ ($100,000 annually).

This means the seller is asking the buyer to pay 10 years’ worth of future profits now, for the benefits of owning the business.

$100,000 pa over 10 years =  $1,000,000. Conversely, $100,000 divided by $1,000,000 = 10%.

The Conflict

Hence, business sellers tend to emphasise the return they are offering but buyers place their emphasis on risk when they are buying. The seller is emphasising the reward for the funds invested. The buyer is weighing up the risks of not getting that return after they’ve invested the funds. 

Advisors to buyers (accountants in particular) give business owners and business sellers conflicting advice on ‘price’. Because they are not in the business sales marketplace. They seldom know the state of the market, and very likely, have little market evidence to support the advice they are giving.

Often, the advice that these people give business owners is well above the ‘price’ that will be achieved in a sale.

Unintentionally, those same advisors, lacking in market knowledge and evidence, will indicate a ‘price’ well below the market to their business buyer clients.

Business Brokers Will Present the Market Evidence Without Bias to Both Buyers and Sellers.

Enquirers must stand their ground. And always ask if there is market evidence on which the advice is based. That’s a fair question. 

A professional broker’s advice will be based on market evidence, not just calculations.

If the ‘informed advisor’ will not move their position on their advice, move on because a successful business sale transaction is unlikely.

Let those giving the advice be responsible to their clients for it.