Growth

Rich and Co.

M+A Topics: Disinvesting In Your Business Equity Reduces Sale Price

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Take Away:  When partners in a business disinvest in the equity and operations of the business, the sales price will suffer.

We represent TPAs and RIAs in selling their businesses and M&A.  We find that, especially over the last few years, FUD (fear, uncertainty and doubt) have led partners in firms to stop supporting the businesses and actually take money out of the businesses for personal use of savings. Especially if the owners are nearing retirement.

This can backfire.

Businesses require steady investment, upgrades and maintenance to remain competitive and protect and build the equity in the business.

Business development, technology, people and skills, expert knowledge, etc. all these investments need to continue or disinvestment is happening, silently. Paradoxically, a “down” economy and market is the cheapest time to reinvest in your business equity. But, like your clients, it requires acting against your immediate feelings and FUD, and taking a long-term goal perspective.

We see the penalty when it comes time to sell the business or get a co-investor for continuity.

For a business to be a going concern in the future:

  • Someone has to maintain the equity in the operations
  • If there has been disinvestment, say the technology has been allowed to lag, the buyer will have to make-up the lost equity investment and spend to bring operations up to par.
  • This cost will come out of the price the seller is paid, right now.
  • Only if the equity in the business is adequate and kept maintained in the future will everyone optimize their benefits from the business — buyer and seller.
  • If there is not a suitable and continuous investment in the equity of the business returns to everyone will be sub-par — including clients. It takes discipline.

But the main mistake we see is not a problem or unexpected big costs, but a conscious disinvestment in the business for immediate personal gain.

We not saying that disinvesting, in particular situations, is “right” or “wrong” — but it does have consequences.

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Written by Rich and Co.

November 15, 2011 at 5:14 pm

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