THE OVERLOOKED OWNER
THE OVERLOOKED OWNER - A Key Factor in Determining Business Value?
We widely accept that determining the value of a business is a scientific process. Most people think that determining the value of a business involves an in-depth look at the books, sizing up the market, and many other types of quantitative analysis. It is also common to evaluate the management team and their skills and track record.
The most overlooked aspects of determining business value are often the owner and their intentions, specifically, the number of owners, the reasons for exit, and the steps taken to prepare the business for exit. Based on the analysis of 1,511 business owners and their companies, the owner’s personal reason for exit and the actions they have personally taken to exit play a significant role in the value of their business. When comparing two similar businesses in the same geography and industry and of a similar size, if each owner has different reasons for exiting, they will likely have drastically different business values. Other factors that can impact the value of the business include the owner’s steps to prepare for exit and the proportion of shares owned. When added up, these factors can predict up to 53% of the difference in the value of two seemingly similar businesses.
OWNER’S REASONS FOR EXIT
One hundred per cent of business owners exit their businesses—either by design or by default. We can bucket these reasons into three categories that play a role in the value of the business.
1. PERSONAL MOTIVATORS
The first category is personal motivators. The exit reasons include:
When the owner is personally motivated to move on to a new project or chapter of their lives, the value of the business is higher. One might conclude that this category of owners has met the goals they set out for themselves and the business and are motivated to exit to move to the next phase of their lives.
2. PERSONAL CRISIS
The second category is a personal crisis. The exit reasons include:
It appears that when the owner is experiencing a personal crisis, they are negatively impacting the value of the business. The owner may be operating ineffectively due to their circumstance and is failing to meet their personal and business goals. They may be focused on trying to survive rather than harvesting the value of the business. Included in this category is the reason “Time to retire.” This response negatively impacts the business’s value slightly but less than an owner’s personal crisis does. One might conclude that the owner desires to retire because they have met their personal goals but the business has not met the envisioned goals. The owner is hanging up the towel and is not focused on preparing for the exit.
3. PERSONALLY PEAKED
The last category is personally peaked. The exit reasons include:?
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It appears that when the owner feels they have peaked personally, their reasons for exit do not impact the value of the business.
IN SUMMARY
Of the three reasons to exit, it appears that Personal Motivators will have the most positive impact on business value. In contrast, a Personal Crisis will have the most negative effect. Lastly, if the exit reason is Personally and Professionally Peaked, our research suggests no impact on business value.
The decision to exit is only the first step in a series of critical decisions an owner must make. How an owner prepares themselves and the business for exit also plays an important role in determining company value. The analysed areas of an owner’s preparation to exit were as follows:
How an owner approaches each of these areas will have an impact on company value.?
You already know what are the three common reasons for exit and how each affects business value.
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Zach Dogar is an M&A Specialist at ETSC