Scott Bushkie - President, CBI, M&AMI, Fellow of the IBBA

“If you split the baby in half, you’re not getting the value of half the baby.” That’s what a buyer said to me recently, after evaluating a division of a company my firm is representing.

The business owner/seller runs a profitable import operation that retails products via e-ecommerce sites like Amazon and Walmart.com. He’s looking to sell his company’s largest division/brand, a family of highly-ranked home entertainment products that account for about $15 million in sales annually.

According to current market conditions and industry trends, we expected this business to bring a significant interest and it did.  However, early conversations suggest the offers may be somewhat less than if he had sold all or a piece of his entire company.

Why? We have multiple buyers at the table, the business is profitable, it has a solid growth story, and it makes good strategic sense with each of our buyers’ existing operations and goals.

But as one buyer told me, they want more than a strong performing product line. They want the key staff and the business owner to boot.

Sure, we can sign a consulting agreement and structure an earnout that incentivizes the seller to support the new owners and contribute to their ongoing success. But if the seller is continuing to run his own business, they argued, how much commitment will they really get?

“The carrot will always be bigger to grow his own operation,” they said. “We want his undivided attention.”

The seller was less than thrilled with the idea, at first. He’s a serial entrepreneur and has never worked for someone else. (He works out of his home and his idea of business casual is khaki shorts with sandals and a ‘nice’ t-shirt.) Notably, this particular buyer comes to the table with the same kind of casual culture, so I think the partnership might work well.

We still expect multiple offers, including one to buy the whole operation and secure the owner in an attractive equity stake in the larger combined company and employment contract. It will be interesting to track how much that multiple differs from buyers who are just bidding on the division only.

Meanwhile, we’re handling another divestiture on the east coast. In that case, a family-owned business is looking to rein in its obligations and sell off a profitable division that’s located multiple states away from company headquarters.

Whoever buys this business will get a customer list and a couple of trained employees, but the name and branding will stay with the original owners. Here again we’re seeing that buyers aren’t willing to pay standard multiples for the industry, because they’re not really getting a fully operational business. There’s risk and reinvestment to be made in rebranding the business and providing new leadership.

A biblical lore goes, King Solomon once solved a maternity dispute between two women who each claimed a child as her own. Solomon ruled that they would cut the baby in half and divide it between the two women, knowing the child’s real would mother gladly forfeit her claim rather than see her child lose its life.

In terms of business application, I don’t mean to say that businesses can’t be divided. They certainly are, and successfully, every day. But business owners need to understand that the business they built, their darling baby, is sometimes worth less in pieces than it is as a whole.

If you’re considering divestiture of a product line or business division, consider whether that kind of sale is really your only option. Does it make sense to investigate selling minority or majority stakes of the whole company with the right buyer? In this scenario, you may get a higher value and then get a second bite of the apple down the road.  Again, no right or wrong answers here, just smart to investigate all of your options as you only have one chance to do what is right for you.

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A thought-leader in the industry, Scott developed the Cornerstone Process to offer investment banking M&A-level services to the lower middle market. The result is a closing ratio that’s more than double the national average.