IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities. Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses. The following blog has been provided by Michael Beck of Eliciting Excellence (www.elicitingexcellence.com):
The Importance of a Quality of Leadership (Q-of-L) Report
Getting a business sold is no small task. It’s not simply about reaching an agreement on price. Although a formal valuation may be accurate and the two parties may feel the valuation is reasonable, the price a buyer is willing to pay can be a very different number. There are many factors that can affect what a buyer will pay for a company.
Some issues that can drive a price higher or lower are:
- Scalability & Growth Potential
- Customer Concentration and Satisfaction
- Profitability & Cash Flow
- Market Position
- Areas of “Over-Reliance”
- Owner Dependence
In order to assess those issues, buyers often have a Quality of Earnings (Q-of-E) Report prepared and sometimes a Quality of Leadership (Q-of-L) Report prepared as well. These reports will confirm the strengths of the business and also uncover any weaknesses that may exist. These weaknesses can have a significant impact on the price, driving it down by as much as 20-50%! Additionally, a buyer may use the Quality of Leadership Report as a basis for executive/leader interviews.
Because of this, sellers will often have Preliminary Q-of-E and Q-of-L Reports done because they will objectively confirm the company’s strengths and will uncover any weaknesses so they can be addressed before going to market.
The strengths and weaknesses of the business will also affect its attractiveness to a buyer and will influence the terms a buyer requests. We believe these two issues are going to become increasingly important over the coming years.
Our prediction is that there will be a growing surplus of sellers over buyers. The consequence is that buyers will become more selective and more demanding. It will be more important than ever to work with an experienced business transition firm like IBA.
There’s one more issue that deserves discussion. Financing. In many cases the buyer will need bank financing to fund the deal. One of the factors that can affect the terms of a loan (or even whether the loan will be made) is the strength of the leadership team. If a bank feels the leaders can execute effectively, think strategically, and make smart decisions, they are much more likely to make the loan and offer reasonable terms.
It’s yet another reason to consider having a Quality of Leadership Report prepared in advance.
Michael Beck is an executive coach, business strategist, and author. If you have questions about the content of this article or would like to obtain information related to the services offered by Eliciting Excellence, Mr. Beck would welcome communication at (503) 928-7645 or mbeck@elicitingexcellence.com. His company offers leadership assessments and executive coaching, all designed to help successors succeed and owners get paid. Learn more at www.ElicitingExcellence.com.
IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, and real estate communities on subjects relevant to the purchase & sale of privately held companies and family owned businesses. IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.