[51] Business Owners Operate in Markets, Business Sellers Create Them

I often work with business owners trying to sell their companies.

It's a fun job - always keeping me on my toes. When there's a lot of money on the line, the juices flow. The stakes are high.

It's the most exciting time in a business' life cycle, when the equity holders finally get to cash in.

It's also super stressful for the owners since it's when everything gets reviewed. All of the business' operating history is laid bare for buyers to pick over. There's nowhere to hide. The oversights of the past come to the forefront and need to be contended with.?

There's a life lesson there, too. In life, you pay in the future for corners cut in the past. That part doesn't just apply to selling companies.

The company sale process is guided by a key principle: The primary objective for any business owner is to maximize the value of their equity. And the value of their equity is expressed through the price paid for the business.?

But unlike public companies, whose prices are listed on public exchanges visible to everyone, private company prices are hidden. They’re behind the wall - opaque.?

For private companies, early price indications only come to light as a sale approaches. And prices are only made final when the deal closes.

So in order to determine the price, a private business owner has to prepare the business for sale and then create a private market.

A private market requires two key components: (1) Multiple buyers who are making offers, (2) in a concentrated period of time.

First, you need multiple buyers to give yourself optionality. Without multiple offers to reference, you have no comparables on price - and therefore no options.?

Sure, you can look up the market multiples of revenue or EBITDA for your industry, and you should. But that's only one indicator. It provides more of a price range and an indication of overall market conditions rather than the specific value of your business. Remember: Each private company is a singular stand-alone asset, whose value is only truly determined during the lead up to sale within a private market.

Second, to create a private market you need the multiple offers to happen during a concentrated period of time.?

Ultimately, that's what governs a market: time. Or, more specifically, time constraints.

Public markets function because there’s an exchange willing to state prices because they know there are buyers and sellers standing by in real-time ready to transact.?

In a private market, you have to create the timing constraints for your buyers yourself. Without the constraints, you can’t value your business properly.?

Imagine you receive a soft offer to buy your business in January, and then another offer in July, and then two more before Christmas. It sounds great, four offers! But it's not all that helpful. The data points are too spread out and disparate. The passage of time destructs your ability to compare and contrast.?

What you need is to get all of your potential buyers to make their bids within 30-60 days. Those guardrails on time are what give you a functioning private market.

And without establishing that private market, nearly everything else in the business sale process is secondary. The LOIs, the due diligence, the negotiations and legal paperwork - all secondary to whether you have first established a private market.

The same construct can be applied to a business taking on investment. While not a company sale, you still have to establish the business’ value and therefore need a private market.

And the same construct applies to other business scenarios. For example, if you are a service provider, you need to get multiple prospects to respond to your quotes within a concentrated period of time in order to determine whether you're charging too much or not enough.

Value is determined in markets. And when there isn't a public market to find your price, you have to create your own.