As either a buyer or seller, the number one thing to keep in mind: don’t set your expectations too high or too low and risk disappointment or demoralization. It can be devastating to have a number in your head only to realize that the person on the other side of the table is in a different ballpark.
Ease yourself into this process and realize that each player has different goals. It is rare that two individuals can sit down, agree on a price, hammer out the details, and call their lawyers to draw up an agreement.
The most important preparation you can make is to commit to being open-minded, and either paying more than you thought or getting less. And please—consult with professionals who have a history of successfully brokering such deals. Experience and expertise are irreplaceable.
WHAT SELLERS WANT
Sellers want the most amount of money in the shortest possible time with the most advantageous terms. And they want 100% cash at closing. They also want to make sure their clients are being taken care of.
Sellers can seldom expect a buyer to drop a big check on their desks with a note saying, “Go enjoy your golden years and don’t worry about a thing.” Selling a business is a transition where the former owner is still actively involved for around 12 months.
This will mean letting go of some beloved practices and refraining from saying, “In my day, we used to…” These months will be about listening and helping. About watching change without influencing it. And, about truly having the buyer’s best interests in mind.
WHAT BUYERS WANT
Buyers want to pay as little as possible for a business that is thriving and has the potential to grow. They want 100% client retention and they want the former owner to help, not hinder, their efforts.
Buyers like to see continuity, growth patterns and consistency. They look carefully at the age and demographics of a client base. They see the value in a book of business as a shortcut to reaching their revenue goals and they look at it with an unsentimental eye—often a jarring note to an older, retiring financial professional who has invested years to get to this point.
Another factor is the quality of the revenue. Is it recurring, are there advisory fees, is it transactional? Inefficient or sporadic income—even if the numbers are large—can be difficult to value. The bottom line is simple: no buyer wants to purchase a business and slowly watch it dissolve away over time.
FACTORS FOR TRUE VALUATIONS
It’s safe to say that every seller thinks his/her business is worth more than it is and every buyer thinks it is worth less.
For that reason, it’s best to think in terms of ranges rather than hard and fast numbers. No one will be writing a figure on a napkin and sliding it across the table. Rather, there are some guidelines that the industry has traditionally followed: around two times trailing 12-month revenues and/or four times firm earnings. These are just starting points, however, and expect the figures to move up or down significantly.
Finally, and most importantly, any business—like any home—is worth exactly what someone is willing to pay for it. Despite the fact that a business was built on blood, sweat and tears, long weekends and late nights, in the end it is simply a financial transaction. The sooner emotions can be removed from the equation the better.
YOU’RE NOT ALONE
You need professional help. Buying or selling a financial business is complex in terms of pricing and process. As tempted as you might be to go it alone, we has an entire department dedicated to it.
Certainly, understanding valuation and negotiating a price are at the core of any transaction, but so are some other critical issues. Financing options can greatly affect outcomes and satisfaction for both parties. Taxation issues play a key role. Nailing down specifics on commissions, trails, terms and payments is critical. Understanding liabilities, cash flow models, debt, and departure times are better hashed out in advance rather than in court.
In the life of every business, the issues of succession planning become part of retirement discussions. Planning ahead for that day, and aligning your business for an eventual transfer, is one of the smartest things you can do. Don’t wait until it’s too late to start planning the next stage of your life. Give Iron Point a call today!