• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to secondary sidebar
  • Skip to footer

Scale FinanceScale Finance Logo, Interim CFO, Part Time CFO Services, Accounting Support, Temporary CFO, Accounting Bookkeeping Services

Interim CFO, Part Time CFO Services, Accounting Support, Temporary CFO, Accounting Bookkeeping Services

Charlotte · Raleigh – Durham · Chapel Hill · Triad · Southern Pines · Coastal Carolina
Closing the GAAP to Scale Your Business
The FINACA Logo
919-230-4667
Scale Finance, LLC, Financing, North Myrtle Beach, SC
  • Home
  • Services
    • CFO & Controller Services
    • Capital Raise Services
    • Business Valuations
    • Mergers & Acquisitions
    • Professional Consultations at No Cost
  • Professionals
    • Partners
    • Charlotte Team
    • Raleigh – Durham – Chapel Hill Team
    • Greensboro-Southern Pines
    • Coastal Carolina Team
  • Client Experience
    • Closed Capital Raise Transactions
    • Closed M&A Transactions
    • Client Endorsements
    • Information Technology
    • Healthcare, Biopharma & Medical Device
    • Services, Energy, Industrial
    • Consumer, Retail, Media
    • Real Estate
    • Private Equity Groups
  • Recent News
  • Knowledge Bank
    • Best Practices in Scaling Companies
    • Entrepreneurial Management Skill- Building
    • Financial Management
    • Mergers & Acquisitions
    • Regulatory Developments
    • Venture Capital
  • Contact Us
    • Charlotte
    • Raleigh – Durham – Chapel Hill
    • Triad – Southern Pines
    • Coastal Carolina
  • Joining Our Firm

5 Ways Entrepreneurs Hurt the Chance of Selling their Business Successfully

Source: Axial Network

Every selling business owner dreams of the same exit outcome: sell high, retire well. As such, in the years leading up to the sale, most owner-operators become marketing experts – articulating the strengths of their company, showing would-be buyers the potential for continued growth (and ultimately buyer return).

What most owners fail to recognize, however, is that rather than focus solely on the good, they should look closely at the bad. A vital exercise in preparing a company for sale is to stamp out the ways in which the business may be destroying value on its way there. There are five common warning signs that this is happening and that a business is at risk for selling at an inopportune time, for a lower price, or perhaps not at all.

Your business is too dependent on new sales

As a means of survival, many businesses operate with a transactional mindset. You seal the deal and quickly move on to the next prospective sale, while putting little effort into client retention. However, business growth expert, Dorie Clark, recently noted in a Forbes article that if your business is driven by new sales versus long-term contracts, the value of your company will be driven down due to long-term risk potential. Therefore, contractually recurring revenues from contracts for annual maintenance, annual licensing fees, retainer fees, technology licenses, and others are much more powerful value-drivers for buyers.

Your business is too dependent on an indistinguishable commodity

From a buyer’s perspective, a business with a lack of unique value proposition (UVP) and no real differentiation in the market increases risk and decreases value. A commodity product or service that is difficult to defend with lower margins and profit potential will be consistently challenged by the market.

A prime example of the impact of UVP on business valuation can be seen in the acquisition of microchip manufacturer, Altera by industry behemoth, Intel. . In the wake of the deal announcement, many pointed to Altera’s success in creating high barriers of entry leading it to achieve some of the highest margins in its industry.

Inked at $16.7 billion, the Altera acquisition is now the largest in Intel’s history. Since the announcement, Altera’s market cap has reached $15.52 billion and Intel’s stock price has increased by 7.2%

Your business is reliant on you

While you may see it as a positive that you’ve been integral to the business during its growth years, a sale process is the time to position the business to be able to run without you. Owner-dependent companies are often considered knowledge-intensive firms, where a significant amount of unwritten knowledge lies with the owners. With no system in place to transfer this intellectual capital to the buyer, the price, marketability and deal structure of a sale will be negatively impacted with the increased risk perception of the buyer.

In an interview with Forbes, Axial member Brent Beshore commented that “everyone loves to feel needed, but for an owner trying to sell his business, this is a major challenge.”

“The more vital the owner is to the business, the more challenging it will be to replace him,” he added. “Replacement costs for owners involved in day-to-day operations typically fall between $125,000 and $400,000 and are deducted from the estimated EBITDA”

Your business is in a market with no potential

According to a recent report in Gigaom, another issue is that your business is in a narrow market segment, which increases the buyer’s risk and negatively impacts your valuation. For instance, the best case scenario for a limited market business is that a buyer feels modifications can increase your valuation on a post acquisition performance basis. However, even with 100% market penetration, your earning potential is still capped.

In an interview with Gigaom, Martin Wolf, founder and president of his namesake middle market IT M&A firm, noted that a narrow, limited market segment is at risk of acquisition windows for larger companies based on economic conditions. Wolf used a hypothetical example with Oracle to demonstrate his point about how a larger corporation can reduce the value of a market segment.

Related Reading: 5 Things to Consider When Your Competitor Makes an Offer

For instance, if Oracle acquires your competitor, it makes a play into your segment by leveraging its product line or services as complementary sales assets. However, by acquiring these complementary assets, Oracle also buys invaluable partnerships and customer relationships, thereby reducing the value of all companies in that segment.

Your business is too dependent on a few customers

If your business lacks customer diversity or high client concentration, it’s negatively valued in the acquisition market as the risk factors increase, Beshore stated. Should a customer discontinue his or her affiliation with your company, revenues will be significantly affected.

“The more power any outside force has over the performance of the business, the riskier it is,” he argued. “For instance, if a client represents more than 20 percent of revenue, multiples typically start to drop.”

Ultimately, in these situations, if you can negotiate the sale of your business, you may receive a down payment for the value of your business assets. However, you may also be compelled to take the remaining value in a seller note, or an earn-out based on future performance.

About Scale Finance

Scale Finance LLC (www.scalefinance.com) provides contract CFO services, Controller solutions, and support in raising capital, or executing M&A transactions, to entrepreneurial companies. The firm specializes in cost-effective financial reporting, budgeting & forecasting, implementing controls, complex modeling, business valuations, and other financial management, and provides strategic help for companies raising growth capital or considering M&A/recapitalization opportunities. Most of the firm’s clients are growing technology, healthcare, business services, consumer, and industrial companies at various stages of development from start-up to tens of millions in annual revenue. Scale Finance has multiple offices in the Carolinas including Charlotte, Raleigh/Durham, Greensboro, and Wilmington with a team of more than 45 professionals serving more than 130 companies throughout the region.

Primary Sidebar

Knowledge Bank

5 Rules for an A+ Board Meeting for Investor-backed Companies

Understanding & Using Your Cash Flow Statement

Why Business Valuations are Helpful (& What do they Typically Cost)?

Managing Merchant Fees – Role of Zero Fee Processing

Can Accountants Value a Business?

Personal Guarantees – Should You Grant One?

10 Pieces of Advice When Someone Wants to Buy Your Company

Convertible Note Financing – Payback Time

Due Diligence Fiasco – A Look Back at HP-Autonomy

Applying for Business Loans – Hard Credit Checks

7 Ways a Business Name Generator Can Help Entrepreneurs

Citizenship by Investment Overview

Understanding the True Cost of Employee Turnover

How to Think About Valuation When Raising Venture Capital

What it Takes to Shift to a Recurring Revenue Model in Hardware & Software

Differences Between Major SBA Loan Programs – SBA 7(a) vs. SBA 504

5 Reasons Entrepreneurs Don’t Get Funded (Which Are Not Their Fault)

Balancing Profitability Versus Growth

Bootstrapping Your SaaS Business – What’s Changing

Best Options for Small Company Loans

Explore the Knowledge Bank…

Secondary Sidebar

Recent News

SF Closes Acquisition of Midwest Outdoor Resorts for Travel Resorts of America

Scale Finance Advises FX HedgePool on $8M Series A Funding

Scale Finance Closes $7 Million Senior Debt Financing for Travel Resorts of America

Scale Finance Advises on Acquisition of Falcone Crawl Space & Structural Repair

Congrats to Payzer for Closing $23 Million Equity Financing

SF Client Headbands of Hope Closes Strategic Growth Investment

SF Assists Semper Investment Company in Acquisition of ACM Removal

SF Client SentryOne Acquired by SolarWinds (NYSE: SWI)

Scale Finance Assists GPM with Acquisition by Netsmart

SF Client Broadstep Behavioral Health Continues National Growth Through Acquisitions

SF Client Impact Financial Systems (IFS) Acquired by iPipeline

Scale Finance Assists TrueLearn with Investment by LLR Partners

Scale Finance Assists Textum Weaving with Investment by Quad-C

Scale Finance Closes Debt Financing for Horizon Eye Care

Scale Finance Closes Acquisition of Horsepower Site Services by MCG Civil

Scale Finance Closes Growth Financing for Celerity

Scale Finance Advises on Acquisition of Reliant Transport

More News…

Footer

Media

Scale Finance Managing Director Dave Gilroy interviewed on WSIC Radio (local Fox affiliate)

/wp-content/uploads/2014/02/David-Gilroy-Interview-Local-Biz-Now-2-7-14.mp3

Entrepreneurial Tips

  • Funding Tips from Scale Finance
  • CIE Life Sciences Panel Discussion
  • Why Use Fractional CFO Services

Sign Up—Finance Bulletin

Monthly insights into corporate finance for entrepreneurial companies

Sending

FINACA is a nationwide network of independent finance and accounting consulting firms focused on delivering exceptional client service.

FINACA is a nationwide network of independent finance and accounting consulting firms focused on delivering exceptional client service.

Return to top of page

Copyright © 2008–2023 Scale Finance, LLC
Securities and offering services through Charles Towne Securities, LLC. Members FINRA and SIPC.