Some 18 months ago I wrote a piece for New Model Adviser called ‘why your business isn’t worth what you think it’s worth.’
The article explained some of the tactics used by certain buyers of businesses to attract owners. In particular, the tactic of getting an owner to commit to the sale process by offering them an artificially inflated valuation.
This value then gets chipped away both during the due diligence process, and often during the payment period.
Following that article, I had a number of people contact me. I have discussed the issue with many accountants, solicitors, owners and former owners. The subject was raised again just this week. Thinking about it again, I reach a conclusion.
Nothing has changed.
Let me share some of these conversations. One owner who contacted me was bought by a consolidator. He had an excellent experience and received all the money he was promised. It does happen.
Another person told me that they received some 70% of the amount they were promised (which itself was lower than the initial valuation), due to issues such as clients not staying. Which, of course, was not under his control.
The third person told me that his payments simply stopped after 12 months. When he made enquiries, he was told that he would not be getting any more company. He could not afford to take legal action.
The Alternative Exit
Since I sold the majority of Ovation to an employee ownership trust (EOT) in March 2018, I have spoken to hundreds of business owners.
The EOT allows owners to receive a fair value for their business, yet also see it continue, leaving a legacy. No other exit offers this combination. And if the management team or advisors want to buy some of the shares, this can be accommodated by a hybrid scheme.
It is, therefore, important to get the business – including the management team – ready for the sale. The Eternal Business has already helped many companies going through the process of preparing for sale to EOT. However, it is a fraction of the many hundreds of owners I have discussed the EOT with, let alone the thousands who have read my book, article, or seen me speak on the subject.
Why, therefore, have more owners not yet decided on the EOT as the exit?
The Causes of Inaction
There are, I believe, three particular reasons why more owners thinking about their exit have not taken action.
The EOT is not right for them. This would include people who are not concerned about leaving a legacy; perhaps the sale needs to happen quickly, for example due to ill health; perhaps there is a management team who wants to buy the whole of the business and are prepared to put up security.
The “I can get more money elsewhere” misconception. The EOT buys the company at an independently assessed fair market value. If it was possible to get more money for your business from a third party sale, then the independent market valuation should reflect this.
Misinformation. I have heard stories of accountants (often the corporate finance arm) and solicitors* giving misleading or incorrect information to owners who are interested in the EOT. Maybe they are just ignorant of the legislation. In some cases, plain untruths are told.
On this last point, if you are wondering why a corporate finance accountant might not be enthusiastic about the EOT, it is because they can get a much higher fee on a trade sale.
What Could You Do Next?
If you want to know if the EOT is the right route for you and your business, get in touch with me. I’m always happy to chat this through on the phone or in person.
The first part of our online Eternal Business Programme is for owners to work out the best plan for them, and start preparing the business and employees. We can also produce a feasibility report before you commit to the process, providing an assessment of your business with the EOT as exit in mind.
What I would ask you not to do, however, is a) to discuss it with your leadership team (until you have prepared) or b) your accountant (unless they have direct experience of the EOT).
And, please – do not take stories of how much other people sell their business for at face value!
*Please be clear – I am not saying that all accountants and solicitors are misadvising their clients. But the stories I hear tell me that some are.
Chris Budd runs the Eternal Business Consultancy, including the online Eternal Business Programme, which advises businesses on succession planning in general, and the EOT in particular.