Monday, 11 July 2016 12:20

As Seen Through A Business Buyer’s Lens

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Marathon’s largest category of business activity is SELLER representation with a smaller part of our activity involving BUYER representation. We contract with either the seller or the buyer, but never both, on a specific transaction. 

On behalf of our sell side clients, we spend a great deal of time with buyers. Hence, we understand buyer thought and behavior processes that drive a buyer’s considerations during the process of buying a business. It never ceases to amaze me how differently buyers and sellers view the same business.
To benefit potential business sellers, I will herein offer some thoughts that commonly run through the minds of buyers. My purpose is to give sellers a glimpse of what buyers see through a buyer’s lens. This insight may help sellers be better prepared to deal with the complex and emotional process of selling a business.
Let’s look at a common scenario…..the 68 year old owner of a long time established profitable business with annual revenue of $2 million wishes to sell his business so that he can retire. Through the lens of the business owner, the business seems large, stable, profitable and with a bright future. He is proud of his dedicated employees and loyal customers. He sees his facility as a good facility for the business. Accordingly, the seller believes his company should be very saleable and at a premium price with favorable transaction terms and conditions.
On the other side, here’s what a buyer is likely to see through his lens about this $2 million business…….The business is only doing $2 million in revenue and in today’s world, size matters. The buyer is concerned about the ability of the business to scale up to a larger size. The buyer knows the business has been stable and profitable, but he envisions new competitive pressures coming from the “big boxes” and the internet . He worries if the business is vulnerable and that profit margins will shrink and sales growth may be hard to come by. The buyer recognizes that the employees have been good employees, but he believes the company may have to “re-tool” the employees to be able to compete differently against the new competition. And the buyer sees a need to diversify the product selection and the R & D required and new learning that will be required may disrupt the current employees. The buyer, who sees a need for growth and diversification, believes the building may not satisfy the business needs for long and he may have to relocate….and the neighborhood is declining and he worries about the declining value of the building. And because he sees a need to scale up and diversify, he believes his capex requirements for new equipment will be substantial.
Moral of the Story..….The buyer sees the business as a good business to buy but sees the risks and challenges that lie ahead. The seller sees his “baby” as a great company poised for growth. The seller thinks he has created a foundation that can be built upon and wants value for it. The buyer doesn’t want to pay the seller for the future growth that the seller will create and only wants to pay for what history has generated.
So what happens during the selling process ? The business is put on the market with all of the positives and strengths highlighted. But the buyer and seller it differently……glass half full and glass half empty analogy. The result is often that the buyer places a much lower value on the company than what the seller thinks its worth.
Conclusion……Both buyer and seller looked at the same company with the same interest….a sale of the company.…..but they see things differently through their respective lenses.. The effect is a valuation gap between what the buyer wants to pay and the seller wants to sell for. As Donald Trump’s book is titled, “The Art of the Deal” now comes into play. The goal is to create a successful transaction for both parties.
More to follow in future articles about negotiating a good deal for all parties.

By: Ray Melcher, President
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May 2016

Last modified on Monday, 11 July 2016 12:26
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