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Don’t Accidentally Sell Your Business, for Less than It’s Worth

Posted on October 28, 2008 by Brian

This post is for the newbie’s who have compiled lots of good business reasons to take the easy route.  Let me explain.  Let’s say entrepreneur “John Doe” decides to launch a category level ecommerce company servicing a specific industry, say home improvement.  John is going to establish several partnerships along the way as he builds his business: Banking partnership, landlord partnerships, marketing partnerships, vendor partnerships, employee partnerships, etc.  We’ll use vendors in our illustration.  Let’s say John is plowing his way through various manufacturers, distributors, and wholesalers in his attempt to setup a vendor network.  Cold calls, conference calls, meetings, pleadings, and so forth.  In the midst of this effort a golden nugget appears.  The largest wholesaler in the country agrees to work with John.  Amazing!  A huge catalog, consolidated supply, good pricing, strong fulfillment, available electronic product data, everything!  John is ecstatic; he signs on, and drops his pursuit of “smaller” vendors.  John just sold his company for less than it is worth.

By entering a hugely unbalanced relationship John has forfeited all negotiating power when, in three years, his wonderful, global vendor decides to acquire or drop John.  John faces accepting their valuation, drastic downsizing while he goes back to the vendor setup process he abandoned three years ago, or closing his doors.  John took the quick and easy route for a handful of seemingly good reasons rather than putting in the time to build his negotiating position.  The quick, big dollars John saw were followed by a less than optimal transition, or forced exit.

Sometimes this conscious decision makes sense.  For example, when you’ve grown enough that the next level requires the participation of the biggest players.  However, early on, you’re likely better off applying some elbow grease to create some value.

Luckily, we were able to avoid the scenario John suffers above.  However, our banking relationship is an example of an unbalanced relationship that hasn’t gone as well for us.  Early on, we had the opportunity to engage small local banks, medium regional banks, or large national banks.  We went with the big boys.  Since then, our small fish in a big pond position has caused us to suffer in terms of customer service, flexibility, available tools and so forth.  If I had to do it over again I would have started with a medium size bank that we could grow with and eventually graduate from.  The scale of mutual value on both sides of the relationship would have been more equitable.  At this point the transition is more costly than the pain so we push on.  Thankfully, this relationship doesn’t have near the negative slant John’s vendor relationship had.

These days we’re becoming a bigger fish who can swim well in bigger ponds.  It may have been harder building our company without some of those big vendor perks but looking back it was the right decision.  We still own our company, both legally and practically.

So, watch out for those unbalanced relationships; you may be negotiating your valuation earlier than you think.  Don’t accidentally sell your business before you even get going.


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