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Thinking Like a Buyer and Succession Planning

By Generational Equity

thinking like a buyer

I recently attended a webcast entitled “Succession Planning for Closely Held Business Owners” hosted by Expert Webcast and sponsored by Anton & Chia, LLP. The webcast’s focus was just as the title implies – the importance of effective succession planning for owners of privately held companies. Although the panelists made a number of good points on how important this topic is, one thought they raised really struck me as most valid:

  • The most important issue for a business owner to tackle when considering a succession event is to objectively view the company as a buyer/new owner would.

Although this concept seems intuitive, it is truly remarkable how far too few business owners follow this admonishment. And it applies to nearly all succession events (unless you simply close the doors and sell off the inventory), but especially any transition to a third-party owner.

Why? Because most business owners are far too close to the day-to-day operation of their businesses to objectively examine, without some help, the positives and negatives of the company with a critical eye.

Most business owners err in either one of two directions:

  • Being far too critical of the deficiencies of the company to see any positives OR
  • Being overly optimistic about the possibilities of the business to adequately address areas that might cause new ownership concern.

The first instance is most often seen when owners are simply burned out from running the entity and are tainted by the daily issues they must deal with to see the possibilities of where the company can go under new owners.

However, by far, most business owners fall into the latter group, being too close to the “positive” aspects of the company to truly see the areas needing improvement that might concern buyers. We encounter this all too often when working with our clients and interacting with many of the attendees at our M&A conferences.

Let’s look at a few of the most common blind spots that cause a deviation in value (DIV) from a seller’s point of view and a buyer’s outlook on a company: customer concentration and owner dependence.

These are actually two areas we have discussed before as they tend to be two of the most common issues causing DIV that we see.

Customer Concentration

From a seller’s view = The fact that 20% of our revenue comes from one client and that 50% of our revenue comes from the top 4 is a positive. Look at how tremendous we treat our customers. They have been with us for years and are loyal and continue to purchase from us because of the great service we provide.

From a buyer’s analysis = If these four clients disappear after the deal closes, we lose half our revenue and most likely even more of our earnings. What are we buying if that occurs? What good is the history of these relationships if they disappear overnight? And are we giving away our product to retain these relationships? (Underpricing is a common issue we deal with.)

Do you see how different the perspectives are? A buyer, looking at the same set of facts, can and will come up with a much different valuation of the company than the seller will; hence the deviation in value.

Owner Dependence

From a seller’s viewpoint = I have grown this company from the ground up! I have received industry recognition and accolades. I have become an expert in our field and because of this, the business has grown and prospered.

From a buyer’s eyes = Where is the middle management? Who is ready to take over the key role that the owner has created? Is anyone outside of the owner even known by the key clients? Who has the name recognition, the business or the owner? If we ask the owner to provide us a list of key employees and their roles, can he/she do so?

Again, same set of circumstances but far divergent views of valuation issues.

That is why it is critical for business owners to develop the mindset of a buyer when considering the transition of their company to any third party. You literally need to dissect the entire operation, every department, every team and ask, how would a buyer view this?

Having said this, recognize that this is not an easy thing for business owners to do, especially those who have been running the business for quite some time.

To accomplish this goal, we highly recommend that you take the time and invest the capital to hire an M&A consulting firm to guide you. Look for a team that has extensive experience in not only closing deals but also working successfully with owners of private companies. The reality is entrepreneurs are the HARDEST folks do deal with when it comes to being honest with them about the deficiencies in their businesses.

As Warren Peck, the owner of Phoenix Rising Aviation told me when I interviewed him after his deal closed, “No one likes to be told that their baby is ugly.” We told him this after our evaluation was completed, but in the end, we also found a great buyer for his business. Our honest evaluation helped him to bridge the DIV gap between what he thought his company was worth (priceless) vs. how buyers viewed his company (great business, lots of potential, just needs some improvement in key areas).

This is why the first step with our clients is a full business evaluation by valuation professionals. This 60- to 120-day process allows us to ask the hard questions that buyers will eventually be asking. It also allows us to give the owner a range of values to expect in the market and most importantly, via our Roadmap for Enhancing Value, we give the business owners concrete areas to focus on to improve their value, even while we have them in market.

Even though our team is comprised of brilliant valuation professionals (we were awarded Valuation Firm of the Year in 2020 by the M&A Advisor), the steps most business owners need to take to close the DIV divide are not rocket science. Generally speaking, if you can begin to take steps the following steps, you will be making great strides in bridging any valuation gap between your expectations and the buyer reality.

  • Reduce owner dependence
  • Improve customer concentration
  • Enhance profitability
  • Augment sales and marketing teams and processes
  • Reduce customer and supplier churn
  • Document key internal procedures and policies (this idea is anathema to most business owners but it is critical to do as your business grows)

My question to every business owner is this: Can you objectively (without emotion) substantially review the operations of your business the way a buyer will? If the answer is no (now be honest), then hire Generational Equity to work with you on your exit planning process.

Carl Doerksen is the Director of Corporate Development at Generational Equity.

© 2021 Generational Equity, LLC. All Rights Reserved.

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The professionals at Generational Equity then helped develop a roadmap for enhancing the value of the firm and an evaluation report. This was completed by June 14, 2021. We then developed the Confidential Information Memorandum and put Taylor Studios, Inc. on the market by July.
Generational Equity’s professional staff helped me every step of the way. Their network and professionals are the only reason I sold my company this quickly. For me this is a once in a lifetime sale and I was unfamiliar with the process. I was able to lean on them with questions and concerns.
Betty L. Brennan, President, Taylor Studios
After attending a conference with GE, I decided that the value they bring would be worth the expense and as soon as I started working with them, I realized that was the right decision. When we started to get LOIs, Fred Zweifel took the lead on the communication and supported negotiations throughout the process, which got tricky as we moved forward. I learned that it can be common for companies to make a great offer then work to erode that price with their discoveries, but Fred and the GE team kept that from happening.
Caroline Connelly, CEO, OptoTest
Through the sale process, Generational brought in several interested buyers and we closed in about 6 months. I am so glad I accepted that invitation to the conference and could not be happier with the whole process. The team at Generational coupled with their knowledge and guidance was so valuable that in the end, I know I could never have done this on my own!
JoAnn Ellis, Owner of Fondren 5 Star Kennels
Generational Equity educated and informed us – so that we could be on the upside of a good decision (to sell).
Bil MacLeslie, CEO, ipHouse
Your wisdom and experience were invaluable to me during this once-in-a-lifetime transaction.
Ralph Noblin, President of Noblin & Associates
I wanted to take this opportunity to thank you for all that you have done for us. Not only did you take care of all the aspects of the sale but took extra care to make sure we knew what it looked like every step of the way. I will definitely recommend your company to anyone that is in a position to or looking to exit their business.
Shane and Johanna Kline, Owners of Vision Upfitters
Thank you again for all your guidance and support. Any company will achieve what they intend, if they have you on their team!
Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
T.D., thank you so much! You are a great leader! I love how you are using your gifts and talents to better others. You are clearly a GREAT COACH! This 3 day session undoubtedly changed the future of our business, and very well may have been the sole catalyst to save my company, my health and my marriage! A genuine “thank you” from the bottom of my heart.
Bryan D. Horn, Owner, Over Under Clothing
I quickly recognized that Don was working for Sharpe Mixers above all else, and held our interests above others.
Jay Dinnison, Owner of Sharpe Mixers
We were happy to see the interest in our company and what we cherished has not just a valuable company but an important company to the communities we served in.
Larry Moore, Owner, A Company Portable Restrooms
We thank you Eric and Generational Equity making our dream come true.
Larry Moore, Owner, A Company Portable Restrooms
The process was much more involved than I expected and your help, experience and advice was a big factor in making the negotiations go as smoothly as possible.
Terry D. Wickman, President, Keytroller
I decided to attend the conference and hopefully receive some guidance on how to structure an exit plan of my business. Upon arriving at the conference, I was so impressed with the presentation given by Generational Equity that I set a future appointment that week to discuss the possibility of selling my business with their Senior Managing Director David Robinson.
JoAnn Ellis, Owner of Fondren 5 Star Kennels
We knew it would be a difficult task to have someone really understand our business and our market, prior to researching a possible buyer, so it was imperative that we found someone of your caliber, with definite proven experience in this area.
Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
Generational Equity’s assistance was invaluable in compiling and marketing our business.
Bil MacLeslie, CEO, ipHouse
I couldn’t have asked for a better team than Michael and Deborah. We couldn’t have done it without them.
Robert Evans, President and CEO of Mealtracker Dietary Software
I am pleased that I was able to work with Andrew Byrd throughout this experience. From the first meeting we had in Minneapolis I felt that I was in good hands. His knowledge and expertise is second to none. He guided the process consistently throughout. I feel lucky that I was pared with Andrew and could not be happier that I chose Generational Equity to handle this major life event. Thank you Andrew and GenEq for everything!
Eric Erlandson, Owner, Action Fastenings, Inc.
I would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.
Bil MacLeslie, CEO, ipHouse
Greetings Mike. Thank you for the captivating and compelling presentation you made at the Phoenix presentation last week. Over many years in business yours was the most informative and well-presented presentation, on any subject, that I have ever attended! Your energy and enthusiasm combined with your concise and captivating support of your positions with easily understood examples and data was compelling.
Pete L.
The most important contribution I think Ahmad made was with his personality and work ethic. He is sincere, efficient, and very hard working. He was available to me at all times, whether it was for specific detail of the negotiation or just to talk through the bigger picture. He listened, advised, and recommended, but never forced his idea or opinions. In the time we worked together, he became a valued colleague and also a friend.
Salvo Stoch, Founder and CEO of Sleeping Partners
I need to say an immense thank you to Don Ho for his stellar work ethic, attention to detail, and tireless effort. Also thank you to the whole crew at GE! Without you, Don could not do such a phenomenal job. We were shooting for closing and funding before the end of 2020, due to the uncertainty of the political landscape and taxes. I am happy to report we closed last week and will be funding tomorrow.
Dr. Caty J. Catron PhD, RN, VA-BC – Owner, Vic The Picc, LLC
I must say that I have never worked with a more driven, competent and focused individual as Don Ho.
Jay Dinnison, Owner of Sharpe Mixers
We were represented by Michael Goss with Generational. The due diligence was grueling and exhausting, but Michael propped us up and kept us motivated throughout the process. Debi and I continued to ask each other how we could possibly make it through this process without the assistance of Michael. Michael's professionalism and knowledge is absolutely amazing, and we are so blessed to have had him by our side as we made our future dreams come true.
Bob and Debi Lee, Owners of BL Technology, Inc and BL Tl Services, LLC
We had the pleasure of working with Mr. Ahmad Behjati Managing Director, M&A, for Generational Equity during our acquisition of Papa's Dodge in late 2021. Generational Equity and Mr. Behjati represented and marketed Papa’s Dodge. As our primary contact, Mr. Behjati was professional in every facet of this acquisition process, conveying valuable advice most times and assisting us in every step of the process.
Rick Greene of Dobbs Equity Partners LLC
We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.
Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
I wanted to write you a quick letter to express our appreciation and our delight on the outcome of helping us through the process of our recent sale. We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.
Terry D. Wickman, President, Keytroller
Thanks to you, the entire GE team and especially Michael Goss for driving a great valuation, coaching me and driving the process across the finish line. Please let me know if there is anything I can do to support GE going forward. P.S. Given my experience with GE I felt comfortable enough to sign up with Generation Wealth Advisors!
Tom Currier, Former President & CEO, Rackmount Solutions
The help you provided us during each step of this process made us feel very comfortable and confident we were selecting the right approach to transition our Company.
Andy Graham, Vice President, Modern Heating & Plumbing
Michael worked tirelessly, He followed every lead meticulously and urgently to make sure nothing was missed.
Robert Evans, President and CEO of Mealtracker Dietary Software