Growth

Rich and Co.

Disinvesting in Your Practice Now Will Lower Your Multiple When You Sell

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Here is a recent example where we are working with both the buyer and seller in a transaction.  This is a true example that we are working with now and so a lesson in how different decisions affect the sales price of a financial services practice.

Main Points:

  • Buyers pay the most for growth momentum and a “turnkey” operation that requires minimal post-transaction investments.
  • Owners that have disinvested in growth, staff, facilities and business systems will find buyers discounting the price they are willing to pay.
  •  Business and reputation continuity is also more uncertain if a buyer needs to make substantial additional investments or strip assets to cover costs after the transaction.

Conclusion:  Disinvesting in the future of the business for owners reaching retirement age may, or may not, be a legitimate immediate profit-distribution strategy, but doing so will likely lower the final price received for the business.Business Disinvestment Lowers the Sales Price
Spending the current profits and cash of the business outside the business often is appealing and “makes sense” – in the moment.

  • Running Lean – In times of uncertainty and stress, pulling back on business investments may seem sensible.
  • Directing Cash to Owners – For lifestyle or life-stage reasons, directing profits to the owners of the business focuses on the immediate needs of the owners.
  • Indecision and Uncertainty – It is difficult to know when and where to make investments in the business.  There is never a clear road map and often losses and mistakes occur.

There are more reasons to disinvest in the business and increase current consumption of business money flows.  Those decisions can be argued both ways.

However, the consequences of disinvestment we see having very practical results on lowering the return to the owners of the business when it is sold.

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Written by Rich and Co.

May 17, 2011 at 5:08 pm

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