Bridging the Value Gaps

Gary W. Ampulski, PhD
Managing Partner of Midwest Genesis

(This is the first in a series of articles on how owners can identify and close the value gaps that exist in the sale of their businesses BEFORE entering into the actual sale process. Future articles will feature critical topics and several subject matter experts that will focus on the identification and options where gaps can exist and how sellers can achieve alignment between perception and reality.) 

There is nothing more disappointing when selling a business than realizing the gap between what you, as the seller want to put in your pocket and what potential buyers are willing to pay. But in a sale process there are more gaps than you might imagine. Many more.

There are valuation gaps generated by timing issues between a “buyer’s market “and “seller’s market.” There are gaps in the value you as the owner perceive you’ve put into a business and the value a buyer perceives he or she can get out of it. Even the various methodologies (income, asset, and market based approaches) used to establish business appraisals generate gaps in value.

There are also differences between what an owner needs to support a retirement lifestyle and what can be extracted from a transaction at the actual time of sale, as well as differences between an offer to buy, what the buyer pays, and what the seller ultimately gets. (Yes, death and taxes play a major role in the satisfactory outcome of a transaction.) And finally, the timing of retirement and buyer’s vs. seller’s perception of risk in the future growth and earnings flow for the business play a considerable role is the size of the valuation gap. Selling a business is a complex financial and psychological process with many moving parts, any one of which can cause a major misstep resulting in a regrettable impact on value. Value is much more than financial, it is the sum total of all the factors that contribute to the seller’s level of satisfaction from a transaction goal.

Why These Gaps Exist

According to the Business Enterprise Institute, perhaps the biggest issue is that owners aren’t quite convinced these gaps exist: at least not for them. And if owners aren’t convinced that the gaps exist, they will be reluctant to invest any resources into bridging them. Harvard Business School Professor Howard Stevenson has stated that this common misperception is based on the inherent optimism and lack of knowledge of the entrepreneur. Separately these issues are unhealthy, but together they create a formidable obstacle to planning a successful transition ultimately killing a satisfying exit experience.

Undue optimism and lack of knowledge are extremely dangerous to an owner when they are forced to estimate:

  • The current value and likely growth rate of their business,
  • The future performance of their non-business assets,
  • The amount of money they will spend in their post-exit lives,
  • Their life expectancy, and
  • How to look after loved ones in the event of disability or even unexpected death.

Typically, owners overestimate financial value because they appreciate how difficult it was to start and build a business to its current state. They fall victim to the notion that what they put into the business is the same as what a buyer will get out of it. They are bullish on future business growth and investment performance. They are in denial about how much money they will need in retirement to maintain a desired lifestyle, and haven’t given a whole lot of thought to how long they will live after they leave their companies.

This warped ecosystem shaped by optimism and ill-informed assumptions:

  • Blinds owners to how wide the actual gaps are,
  • Handicaps their ability to appreciate how long it takes to bridge the gaps, and
  • Creates a toxic environment for disappointment, frustration, and failure.

Owners often use this optimism and lack of knowledge as license to postpone taking the actions necessary to create the outcome they desire. Until they understand that where they think they are is a far distance from where they actually are, and that where they need to be is even farther than where they think they need to be, it is business as usual and nothing will happen. Knowing — not guessing — what you have and what you actually need is key to closing the many gaps that exist.

And the non-wallet considerations for owners who haven’t thought through what life will be like for them after the sale of the business are often minimized or overlooked altogether. The Successful Transition Planning Institute calls these the head and heart issues around leaving a career. These are the “soft” emotional challenges that transactional advisors don’t address, which, if not resolved up-front, can cause an owner to sabotage a transaction for no business reason.

Closing the Gaps

The goal of a business owner when considering a sale is to achieve perfect alignment (zero gap) between the various factors. For most owners, this is extremely difficult to achieve without the help of experienced advisors. The table below shows some of the many areas where skilled advisors can help achieve alignment. (Future articles in this series will discuss each of these in more detail.)

Selling a business is largely unchartered territory for people who have spent their lives developing processes that provide, market, and sell a product or service at a profit. But when it comes to implementing an effective process that prepares, markets and sells a business, the game changes dramatically. In nearly every case, it takes a team of experienced subject matter experts to navigate a course successfully out of the briar patch of legal, accounting, valuation, planning, and marketing considerations that are involved.

An exit advisor can address the biggest gap of all: providing an understanding and knowledge on the difference between imagination and reality ahead of the actual sale and negotiation process. It takes time and experience to bring everything into alignment and owners struggle to coordinate this unfamiliar process while still running the business. It was Mark Twain who said “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

(The next article in this series will cover why setting goals for a company sale is an owner’s critical first step in the overall process.)

About the Author

Gary W. Ampulski is Managing Partner of Midwest Genesis (www.midwestgenesis.com), a boutique advisory services firm focused on Business Value Enhancement, Operational Due Diligence, and Transition Planning/Execution. He is a former CEO of two public companies and business owner with experience in start-ups, joint ventures, internal growth, corporate development, turn-a-rounds, workout and M&A transactions.

Over the last eight years, Ampulski has advised private equity groups, lenders and middle market business owners on strategic planning, operating improvement and business value enhancement. He has created multiple investment theses and partnered with both private equity and buy-side investment banking advisors to connect investors with target acquisition opportunities through market assessment, platform and add-on identification, business valuation and due diligence support.

Mr. Ampulski holds a BS, MS and PhD in Physics from the University of Michigan. He has received certification credentials as a Mergers and Acquisition Advisor (CM&AA) from the Alliance of Mergers and Acquisition Advisors® and an Exit Planning Advisor (CEPA) from the Exit Planning Institute. He can be reached at (847) 573-9966 or email: gampulski@midwestgenesis.com

2018-07-20T10:54:02+00:00