The Skeleton Talk
When you own a business, you're intimately aware of the issues and eccentricities and downright problems of that business. Maybe they play out in the back of your mind or maybe they barge their way into the forefront of your everyday operations and concerns.
They're sure to be front and center, though, when you start thinking about selling your business. At that point they're less "things we should fix or improve or optimize one day" and more "skeletons in the attic."
Whether you think the issues will keep you from finding a qualified buyer, tank your valuation, or find their way into the rumor mill, when faced with discovery calls and negotiations and diligence, it can start to feel like the best option is to bury those skeletons under a few shoe boxes and the winter coats and hope your prospective buyer doesn't notice.
Why You Should Bare Your Bones
If you want a credible valuation for your business, you've got to let your skeletons out in the open and walk them around a little.
There is no perfect business. Businesses are collections of people trying to accomplish something; people are messy, and therefore companies and organizations are, too. Every company has its fair share of issues.
The point isn't to play a game of "Gotcha!" when identifying issues, but to understand how the business operates, what you envision the future to look like, who's involved in the business, what the history has been (good and bad) – and how that's led to where the business is now (good and bad).
And, a healthy history of failure can actually be a feature for investors. If your organization has a history of encountering obstacles and being able to turn them into opportunities (even if those opportunities aren’t always fully realized), it shows innovation, resilience, and an ability to learn from past failures – all of which present a more compelling narrative.
The relevant questions are then not whether there are issues to be solved, but instead: What are the type and magnitude of the issues? How have problems been approached in the past? What are the obligations of the business that would exist after a transaction?
Diligence and Bone-picking
Of course, when you're entering into a conversation with a prospective investor, it's fine to stagger the information you give. Ideally, you're developing a solid, trust-based working relationship, and that's not going to come all at once in a single conversation. There is, however, a difference between disclosing different layers of information at higher levels of trust and deliberately holding back or hiding damaging information – shoving some furniture in front of the door to the room with all the bodies.
But that's what diligence is for. And if you're working with a competent investor, they're going to find out eventually, and it's that "eventually" that matters.
Case in point: Let's say, based on our conversations and the information you've disclosed about your business, that we think your business is worth $45 million. The process moves along with that valuation in mind. And then, at some point, you say, "Oh by the way, did you know that we sold the building in a 20-year lease-back that the business is obligated to? And I sold the IP, so we don't actually own it anymore. And we're in three lawsuits around employee issues."
Your business is no longer worth $45 million.
For us, conviction and disclosure are directly related to one another. If we learn something at the beginning that turns out not to be true, that's problematic. Not only is there the issue itself (which was always going to be there), but there's also the erosion of trust that comes with feeling – and being – blindsided and misled. Ultimately, those types of deceptions waste everyone's time, and even if the conversation and the transaction continue, the relationship shifts, the table is poorly set, and distrust and wariness creep in. And, the damage may be irreparable.
Nothing New Under the Sun
The upshot is that because all businesses have issues and a few skeletons hanging around in a dusty corner, any problem you've got is probably going to at least resemble something an investor has seen before.
Current challenges in your business are potential opportunities for investors. The real returns come from being able to solve problems, particularly at that "tastes like chicken" layer of business. But it only works if we know what the problems are. And we can only make a call on whether or not we're the right ones to help solve your problems if we know what they are in advance. Yes, there are deal breakers, but a business that's an honest hot mess has a lot more potential than one that's trying to hide even a small mess.
Hiding issues makes the path to close harder. For one, in the purchase agreement you will legally attest that you’re not hiding anything material (and will be liable for damages if you do). But even avoiding legalese, it makes a lot more sense to continue down the path of a conversation that starts with, "I know you're interested in investing. I've got to tell you now, early on, that we've been putting band-aids on XYZ problem. Can we be thoughtful and fair about what that means in terms of operational priorities and valuation?"
Because there's not a single business out there without any problems, and because most investors have seen some version of any problem you've got, bring out the skeletons. If you do it early and reasonably, you're proactively sharing all the information that a buyer needs to confirm that things are what they look like and that they're organized the way that you said they were. It sets expectations for the relationship and the transaction – and gets everyone working towards the same objective.
Take Stock of Your Skeletons
If you want to get an estimate of how much your business is worth and potential problem areas to work on while remaining confidential, an easy place to start is our Instant Appraisal tool.
At its core, Instant Appraisal tells you what other people might think about your business. From inputs like earnings history and quality, volatility, customer concentration, regulation levels, IP and brand advantages, how many people would have to agree to a deal, where you're located, etc., it assesses the complexity of your situation and provides a valuation range – plus some potential areas for improvement to move to the higher end of the bell curve. (And, for the confidentiality-minded, the results are just for you until/unless you decide you want to send them to us to start a conversation.)
And, if you're ready to start a conversation, we're always up for a skeleton talk.