Exiting? A Buyer’s Perspective

While Paul Simon wrote and sang the hit song, “50 Ways to Leave Your Lover,” there are only three ways to leave your business.

Option # 1: Inside sale to family and or employee(s) potentially offers the seller the most control and tax benefits over the transaction. This option requires two-to-five years plus lead time, and you may need to help the employee(s) with financing the purchase.

Option #2: Outside sale to a strategic or a third-party buyer may speed up the time table, and get you cash faster than an inside sale. The best part is you don’t have to worry about helping  an employee with the financing.

Option #3: A liquidation may be planned or unplanned. A planned liquidation of inventory may be perfectly viable if the owner is unable to find a suitable buyer in the required time frame. Bear in mind, the owner is giving up any good will for the business itself. An unplanned liquidation can be like holding a fire sale with highly discounted pricing. Who and how you would like to sell or transfer your business to depends largely on your goals and time frame. Always review the transaction with your legal and tax advisor.

“What’s the value of my business?”

A seller would be well advised to put themselves in the buyer’s shoes when considering a valuation. The value of a business is nothing more than the buyer’s assessment of risk. The less risk the buyer perceives, the higher the price he or she is prepared to offer. The more risk the buyer perceives, the seller will undoubtedly be disappointed with the offer. Caveat emptor Is a Latin term defined as “let the buyer beware.”

Buyers usually feel that sellers are asking too much. Sellers feel that buyers are offering too little. Cognitive sciences call this the “endowment effect” and offer many reasons for the valuation discrepancy, ranging from loss aversion to evolutionary factors. In the end, the fair market value of a business is determined by what an informed buyer is prepared to pay, which is governed by the risk factor.

When it comes to how much a business is worth, who better to ask than Steve Zapf, president of Music & Arts based in Frederick, Maryland.

With more than 500 retail and affiliate locations, 120 educational representatives, and over 1.5 million lessons taught per year, Music & Arts is one of the nation’s largest school music retailers and lesson providers. The organization is the dominant national buyer of music retailers. Music & Arts look for strong rental programs and companies that emphasize band and orchestral sales and school service.

I asked Zapf a series of pointed questions regarding his valuation process. Many of his answers revolved around the importance of the seller’s intangible assets. For example, when I asked Zapf what were the key drivers for valuation multiples, the seller’s intellectual capital was on the top of his mind.

“Larger businesses with consistent earnings that are less dependent on a single person provide for a more stable and predictable operation after the acquisition,” he says. “These are factors that give us the necessary confidence to increase the multiple we pay.”

When at NAMM, it’s not unusual to hear an owner “brag” how his business couldn’t exist without him. The buyer is looking for transfer value. If the exiting owner owns the relationships, and all processes are locked up in his head, what is the buyer really buying?

Process and data called “structural capital” is a key intangible asset, and is usually the straw that breaks the camel’s back. Zapf says it this way: “Inventory accuracy is often a problem in deals. Often, we are buying assets, or if we are valuing income, we may require a minimum amount of inventory consistent with a business that is a going concern. Unfortunately, all too often we find that the confidence in the inventory number in the computer or on the balance sheet is not very high. This can create a lot of stress in the final hours of the deal when we do a physical count and find out just how much inventory really is – or in some cases is not – there.”

When I asked Zapf for his final thoughts, he said: “You can tell a lot about a business from the organization of the store, the shop, and the warehouse. Clean, well-organized operations typically have the most accurate financial information as well – all of which increases our confidence in the future value of the business as a part of Music & Arts.”

Lesson learned. if you want to increase the offer from a buyer, grow your intangible assets which a powerful way to reduce the risks when exiting your business. If you plan on attending NAMM, I will be offering a must-see session during my talk on how to better manage your Intangibles. Stop by the Idea Center on Saturday, January 27 at 2 p.m. and say hello. Wishing you all a great 2018.

Jaimie Blackman – a former music educator & retailer – is a certified wealth strategist & creator of Value-Builder™ | MoneyCapsules®, which capsule value-building activities into 90-day sprints. Blackman helps music retailers accelerate business value now and maximize value when it’s time to exit. Blackman is a frequent speaker at NAMM’s Idea Center. Visit jaimieblackman.com to register for educational webinars and to subscribe to his podcasts.