The 5 Whys: Uncovering the Secret to Selling a Business

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When it comes to selling your business, you can’t afford to learn from your own mistakes. Unfortunately, business owners often learn the hard way after the fact. Many take the first unsolicited offer they get, sell a business at the wrong time (too late), or experience a forced exit because of the dismal D’s. Worse yet, many regrets having sold their business because of a loss of identity and purpose after leaving their lifelong passion. How can you avoid these scenarios? How to get ahead and better control your own destiny when selling a business? This article explores the 5-whys you should ask before you sell a business.

Challenges of Selling a Business

Most successful business owners are experts in their field, industry, or market because they have studied the competition and worked hard to offer unique value to customers.   They have been successful in making difficult choices and good decisions that grew their businesses over time.  But it’s difficult to acknowledge the need for professional assistance when it comes to selling their businesses. 

Many owners have an idea of their business’s worth from talking to colleagues and other business owners who may have sold their business at a certain multiple.  Yet, few owners understand the underlying rationale of how the valuation multiples were determined.  They implicitly and incorrectly assume that “babies are the same” or “businesses are similar”, so the same multiple applies.

This couldn’t be further from the truth.  I have two boys who are 22 months apart at the ages of ten and eight.  Though they have my and my wife’s genes, they look completely different with unique personalities and opposite mentalities.  I’ve learned over time that I need to teach them differently, communicate with them distinctively, and value their individual strengths and desires.  The same principle applies when valuing different businesses.  There are no two alike when it comes to selling a business.

So why is the process of selling a business so unsatisfying for owners? This article will address this question using the 5-why methodology to analyze the root cause of the issue at hand.  The Root Cause Analysis (RCA) is a popular and often-used technique that helps people answer the question of why the problem occurred in the first place.  And the 5-why methodology is one of the most effective tools for root cause analysis.  Click here to learn more.

About the author

David Qu is a mergers and acquisitions expert and a strategic advisor with broad practical business experience in various industries, markets, and business functions. He gained expertise from decades of hands-on operational training, management consulting, and senior corporate M&A executive roles with well-known global companies. As a trusted partner and expert advisor to his clients, he brings strategic insights, practical expertise, business management know-how, and execution blueprints to help you maximize the value from the sale of your business. Contact us to learn more.

1. Why is the process of selling a business so unsatisfying?

In Exit Planning Institute’s owners’ survey, we find that 67% of owners fail to properly plan for their exit and 8 out of 10 business owners experience seller remorse.  These are very high unsatisfactory numbers by any measure.  Owners often leave millions of dollars on the closing table because of insufficient planning and inadequate sell-side process.  In addition to a lack of business exit planning, most owners are not prepared for life after business ownership due to a lack of personal exit planning. 

In our experience, we find that dissatisfaction in selling a business is the result of three key issues:

Misaligned valuation expectations

We often see two opposing scenarios when it comes to business valuation.  On one hand, owners think their business should be worth the same valuation multiple as their colleagues or competitors.  We often refer to this as the “country club valuation”.  Just because my competitor sold at 5x EBITDA (Earnings Before Interest Tax Depreciation and Amortization), my business should be worth the same.  What these business owners do not realize is that the EBITDA multiple is an “after the fact” measure of a business’s future cash flow generating potential.  The EBITDA multiple is not an absolute valuation benchmark. 

On the other hand, many business owners often sell their businesses to someone with an unsolicited offer without running a professional sell-side process.  This often lowers the company’s worth because the owner did not expose the opportunity to more qualified buyers and the buyer did not have competitive pressure to pay for the full value.  In both cases, the company’s value could be much lower or higher than the owner’s expectations.  Without proper preparation and diligence, the result often misaligns with the owner’s expectations.

Mismanaged timing to sell a business

Timing is everything, or mostly when it comes to selling a business.  There is an expression, that unfortunately, is very true: “Business owners seldom sell their business too soon, but they frequently sell it too late.”  It has been our experience that many business owners do not plan far enough in advance to maximize their after-tax proceeds when selling their businesses.  Instead, they wait until reaching The Dismal Ds – after experiencing a “hardship” (50% of all exits are not voluntary), or receiving an offer out of the blue without proper preparations to accept or negotiate.

Furthermore, every industry goes through cycles of highs and lows.  Some industries’ cycles are longer than others, nonetheless, every business participates within an industry cycle.  In addition, macroeconomic cycles impact every business.  Every 10, 15, or 20 years, our economy goes through a recession or bull market.  Given these cycles, business sales, profitability, and valuation will go up and down.  Timing to sell a business at the top of the industry and economic cycles, as well as aligning that to the owner’s readiness and buyer’s expectations is very difficult, if not impossible.  To maximize a business’s potential, the key is to be ready to sell at any given time.

Misidentified person objectives

The process of selling a business is an emotional journey for any business owner. It is difficult to part with something that you have worked hard to build and grow. In many cases, it can be difficult to let go of the relationships that you have built with employees, customers, and other stakeholders over the years.

But more importantly, the key contributing factor to seller remorse is improperly planning for life after leaving the business. I have seen owners go through depression after selling their businesses.  one can not overstate the importance of properly assessing the motivation and aspirations of business ownership.  As well as the business owner’s source of identity and purpose.  Without sufficiently answering these personal questions and identifying a purpose beyond business ownership, experiencing seller’s remorse is inevitable. 

In summary, to ensure owners are satisfied selling their business and life after the transaction, they must adequately plan for their exit and be a student of the process so they can make informed decisions.

2. Why is exit planning critical to selling your business? 

In a recent survey conducted by the Exit Planning Institute, 99% of owners AGREED with the statement: “Having a transition strategy is important to both my future and for the future of my business.”  Yet, 94% of owners have no personal plan for life after the business sale, 79% have no written business transition plan in place, and 48% have done no planning at all. These facts are unfortunate, especially when considering most owners have poured years of their lives into their businesses, which is the majority source of their wealth.

Exit planning maximizes transferrable business value

Exit planning is a process that helps business owners identify, protect, build, harvest, and manage value.  It helps to ensure that the business is positioned to attract the best buyers and that the sale is properly structured to maximize value. The effort creates tangible and intangible capital in the business, which will ultimately be used to determine the strategic value of the business.  Furthermore, this is an ongoing process that requires focused investments of time and resources every day.  Having a good exit plan is in many ways like having a good strategic plan.  Read my blog here to learn more. The outcome guides business owners to accelerate value creation and strongly positions them at the negotiation table when opportunities present themselves, which is especially true for strategic buyers.

Exit planning ensures owners are financially prepared

Dr. Stephen Covey once said, “Begin with the end in mind”.  Exit planning helps owners identify personal and business financial goals, where setting goals is the first step in turning the invisible into the visible.  Good exit plans identify short-term and long-term goals, detail actionable steps for execution, and help owners measure progress along the way.   The process is a journey that helps business owners understand the business value, and how it is created and measured.  It allows the business owner to prepare for the financial, legal, and tax implications of the sale and to decide how to best allocate the proceeds. So, when an opportunity of the lifetime presents itself, business owners are prepared to confidently transition knowing their goals are achieved.

Exit planning ensures there is a plan for “What Next?”

Most business owners regret exiting their business shortly after mostly for one reason: not having a plan for life afterward. They find themselves with a lot of time and freedom, but nothing to do. Many business owners get “cold feet” at the closing table because they suddenly realized that their life identities are entangled with the businesses.  Wealth and money cannot solve owner identity questions, this is why most business owners wait until it’s too late to sell their businesses, leaving piles of value on the table in the end.  Exiting planning helps owners address these questions early to avoid cold feet or regrets.

In summary, the exit planning process and outcome prepare companies and business owners for successful exits that maximize wealth transfer and enable a productive life after the transaction. The execution of an exit plan typically matures a business, which increases its attractiveness and value to buyers, especially to strategic buyers.

3. Why do most owners want to sell to strategic buyers?

When business owners decide to exit through a third-party sale, they often desire to sell to strategic buyers because those buyers are willing to pay higher multiples.  So what types of third-party buyers exist and what are the typical valuation multiples ranges for each group?  Here is a glance:

A private individual or family buyer: 2.5x – 4x EBITDA

This group of buyers typically takes over a business and continues operating as is with some improvement.  Buyers are looking for sustainable businesses with positive cash flow with low risks to ensure a return on investment between three to five years. 

Private equity or financial buyers: 3x – 5x+ EBITDA

This group of buyers typically takes over businesses with the goal of exiting in five to 10 years after significantly growing its revenue and/or improving its profitability. 

Strategic buyers (public or private): 4.5x – 12x+ EBITDA

This group of buyers typically invests in businesses to gain market leadership position through accelerated revenue growth, consolidating the market, or building operating scale to achieve cost competitive advantage.  For high-growth sectors like tech and medical device industries, valuation multiples often go as high as 20X or more.

So why a such wide range of differences in the valuation of a business?  Simply put: “The value is always in the eye of the beholder. What is worthless to one person may be very important to someone else.” ― Peter Ackroyd, Chatterton.

Business owners typically prefer to sell to strategic buyers because they are often prepared to pay a higher price than other buyers. Strategic buyers are typically larger companies or organizations with greater resources who have a strategic interest in the business, such as buyers operating in the same industry or gaining access to a new market or customer base. Strategic buyers may also have access to more efficient processes for producing or distributing the product, or have access to new technology that can help the business grow. Additionally, strategic buyers can provide access to capital and the expertise of the larger organization, which can be beneficial in growing the business. Let’s examine in detail the sources of incremental value for strategic buyers.

4. Why do strategic buyers often pay higher multiples? 

A strategic buyer is typically after horizontal or vertical expansions, looking for strategic synergies that will improve their business and/or operations.  These buyers are typically larger, so they can take on more risks, invest in more resources, and capture more synergistic returns.

Strategic buyers can typically take on more risks

Strategic buyers often have a sizeable core business that has yielded excess capital to seek growth inorganically through acquisitions. Given this inorganic growth strategy, strategic buyers generally have a higher risk appetite in accelerating growth and expanding profitability.  In addition, transactions in this scenario typically involve multiple players with interests in the same horizontal or vertical industry.  This leads to fear of missing out, which could result in competitive disadvantage and sub-scale less efficient operations.  For these reasons, strategic buyers are willing to take on more risks.

Strategic buyers can invest more resources for growth

Given strategic buyers’ scale post transactions, strategic buyers can provide more financial and human capital to accelerate top-line and/or bottom-line value creation. These incremental resources often are in the form of invested capital for product development, capital expenditure for high-efficiency equipment, and team expertise.  The result can accelerate growth and unlock the operating efficiencies of the combined company after the transaction.

Strategic buyers can capture more synergistic returns

Since strategic buyers seek horizontal or vertical expansions, they will seek to derive revenue and cost synergies from the integration of two businesses.  these synergies could come in the form of:

  • Top-line revenue synergy sources: new geographies, new products, new capabilities, new sales channels, etc.
  • Bottom-line cost synergy sources: operating scale efficiencies, procurement savings, combining locations, management and administrative efficiencies, vertical integration margin capture, operating efficiency from new capabilities, etc.

Given these synergistic opportunities, how willing are the strategic buyers to pay for them?  The answer is: it depends.  It depends on the seller’s process when selling a company.  Without competition, buyers most likely will not pay more than they have to. And without a professional M&A advisor leading the sell-side process and negotiations, buyers will not have competition or include these synergistic values in their offer price.  This is why the right professional M&A advisor can bring up to 3x the value to the closing table for business owners. However, selling to a strategic buyer is not an option for every business. It will depend on your industry, market, and size of your business. It is critical for you to consult with an expert M&A advisor to help assess your company and your needs.

5. Why work with an expert professional M&A advisor to sell my business?

I have seen good M&A advisors identify and negotiate significant value for owners and I have seen inexperienced advisors destroy value for owners with bad advice. How can good M&A advisors bring incremental value for business owners when selling a business?  Here are five quick areas:

I) Expertise to identify sources of strategic value

A good professional M&A advisor understands your company, your business model, your company’s competitive advantages, and sources of value strategic buyers can benefit from.  In addition, good M&A advisors not only have the expertise to identify your business’s uniqueness, but they will also work with you to craft the right marketing and communication materials to attract the right buyers.

II) Right advice for the right situation

Every business is unique and every sale is also unique because of the transaction timing dictated by the business owner, industry cycle, and economic conditions.  The right advice in one situation may not hold true in a different situation.  M&A advisors’ ability to recognize it and guide owners accordingly is critical to the success of selling a business for the most value.  I have encountered well-intended advice applied in the wrong situation that resulted in millions of reduced valuations at closing.

III) Controlled sell-side process to extract value

Good M&A advisors can control the sell-side process with care and nurture multiple buyers along a controlled process for the benefit of the owner when selling a business.  M&A advisors play a critical role in maintaining confidentiality, objectivity, and credibility for the benefit of business owners.  Remember without such a process, buyers would not willingly pay for the strategic value that they would have to work hard to realize.

IV) Credentials and creditability in negotiations

Good M&A advisors with strategic buyer credentials can better prepare business owners for due diligence.  They can anticipate questions, data requests, and hot buttons.  In addition, they understand the owner’s business to represent them with high creditability.  This is critical during negotiations. Advisor’s ability to provide sound input and pull the right lever in negotiations could determine the outcome of the transaction. 

V) A trusted advisor – benefit outweighs the cost

In essence, business owners are choosing whom to trust when working with M&A advisors because they will only sell this business once.  Many M&A advisors are more interested in closing a deal than in serving the best interest of business owners.  Do you want to be another deal statistic?  Or do you want to solidify a lasting legacy by working with a M&A advisor in the sale of your business?  When working with a trustworthy advisor, benefits will certainly outweigh the cost. Read this article to learn more. Furthermore, choosing the right M&A advisor to work with you in exit planning to achieve personal and business objectives will bring significant value to you, your family, your business, and your employees.

The Bottom Line

The process of selling a business can be daunting, unpredictable, and dissatisfying in the end.  The owner’s remorse statistics reflect that, with 94% recognizing the need to plan, 67% being unprepared, and 8 out of 10  having regrets.  It is not comforting.  But asking the 5-whys to understand the root cause will help owners avoid being another statistic. 

Ultimately, working with a professional advisor who not only has transaction experience but also understands your business and buyer mentality will be the most value-added decision in solidifying a business owner’s legacy and generational wealth.  When choosing your professional M&A advisor, make sure they can identify the sources of strategic value for your business, have the credentials and credibility in representing you, and provide trusted advice for the right situations. 

About Rimonark Advisors

Rimonark Advisors is a client-centric mergers and acquisition advisory firm based in Cincinnati, Ohio. We help clients maximize wealth through business growth advisory, business sale preparation (exit planning), and business sale transaction services. We are here to help our clients get ready for a successful business sale, get the most value, and achieve fruitful confident transitions for themselves, their families and their stakeholders. Ultimately, we help clients harvest years of hard work by unleashing business cash flows and converting them into generational wealth. Contact us to learn more.


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