‘It is naught, it is naught, saith the buyer: but when he is gone his way, then he boasteth’ – unknown author on bargaining
Whether a business deal is a good business deal probably depends on your pre-deal expectations, your ultimate motivations and your time-scale. Any business deal is emotional but those involving the buying or selling shares in companies – particularly private and unlisted companies – can be particularly wearing.
It does not matter if you are a buyer or a seller the core of any good business deal is to be in possession of as many facts as possible to counteract those inevitable (and potentially blinding) emotions that build up.
A potential buyer must be able to justify why they are paying a certain price for a share of a business – or even an entire business. Most businesses are valued off recent historic or near future profitability levels but any purchaser needs to be comfortable that such anticipated levels of profitability can be met but that they can also be sustained and potentially built upon. Noting down the top three reasons why you are considering investing into a business and then trying to work out the impact on profitability if something goes awry on each of those three aspects is sensible ‘stress testing’. This typically does not require a team of management consultants to work out, just a commitment to ask difficult questions and then be unemotional enough to appraise the answers.
Additionally, any business existing in a broader economic setting subject to the impact of exogenous shocks, such as lower economic growth or a rise in interest rates can be difficult to get easy answers to but are necessary issues to think about.
Further, understand the debt levels and banking covenants of any business you are considering investing into. The main reason a business fails or hugely struggles is centred on the debt side and not disappointing profitability levels in itself. Remember if you are buying a share in a business you are buying a share in its profits…and its obligations to service its debt too.
Finally, there are the soft issues to consider, including the quality of third party service providers such as auditors or lawyers, the current motivations of sellers, the culture within a business, the quality of assets and whether you would be happy to be a customer of the business or not.
Turning to potential sellers of shares in a business the key for them is to ensure they understand the reasons why they are exiting an investment. The regret of a selling shareholder who subsequently sees their old investment soar in value, is far greater than the purchaser who does not purchase an ultimately successful company. Clarity of motivation is critical.
One easy psychological ‘trick’ is to regularly put yourself in the position of a potential buyer and go through the check list above. If by going through this process you are less committed to an investment or shareholding then perhaps it is time to sell.
Business deals are about much more than just numbers but emotions, human relationships and sometimes plain intuition. However, a basic quantitative framework and check list can help both buyers and sellers significantly improve their scope to undertake good deals – however they personally want to define that.
To define a Company share value, please CLICK HERE!
To sell a business, please CLICK HERE!
Article sponsored by Argyle Ventures