I think a lot of service business owners get fleeced when they sell their businesses.

I’m going to make a huge generalization, but my guess is that service company owners are  somewhat less financially skilled than their peers who run technology and product companies.

Part of the reason is that the barrier for us to enter a service business is lower, so there is no need to get educated about finance. When you own 100% of the shares and you don’t need to raise start-up money, you can skip the whole learning curve associated with valuing a business, return on equity, discounted cash flow, etc.

I, for one, was blissfully ignorant about business valuation until I actually sold one.

And I don’t think I’m alone. The service business owners I know tend to be a little more right-brained. We can think conceptually, imagine the future and empathize, but perhaps we lack some of the math and science of the left-brain types who run technology businesses.

More emotion, less knowledge

So when it comes to selling our companies, I think service firm owners approach the sale with more emotion and less financial knowledge than other company owners – which is a recipe for getting taken advantage of by the left brain analytics who work in the finance department of acquiring companies or as partners in private equity firms.

And I don’t think our naïveté is lost on buyers. In a recent survey of readers of this blog, fully half of all service firm owners had received an offer to buy their business in the last twenty-four months while only one in ten product-based companies had been approached:

That statistic may look encouraging for service firm owners, but the problem is, those offers were well below the offers received by product-based businesses: two-thirds of the bids service firm owners received were for three or less times earnings; and only one out of all of the service firms surveyed got an offer for more than five times earnings.

Easy prey

My conclusion is that buyers are seeing service firms as easy targets. If they can scoop up a service business for two or three times earnings, and retain the clients by locking the owner(s) into an earn-out, they can’t really lose. Even if there is some client attrition, most buyers make off like bandits in the long run.

Which is why, if you own a service firm, it is critical to go into a negotiation armed with the knowledge you’ll need to defend yourself against these predators.

Arm yourself

To understand how buyers calculate the value of your service business, read this article.  To know when strategic acquirers pay better-than-average multiples, read this article. I’m also going to host a couple of workshops (one in Chicago and another in Toronto) just for people who run service businesses.  You’ll learn how to:

• Calculate the value of your company using the same methodology acquirers use;
• Bump up your multiple;
• Create a reliable stream of recurring revenue;
• Reduce your reliance on a few key clients;
• “Productize” your service;
• Reward and retain key employees without making them a partner;
• Eliminate the need to respond to a Request for Proposal (RFP);
• Increase the number and quality of your referrals;
• Spot and interpret the second most important sentence in an offer to buy your company;
• Shorten the length and importance of an “earn-out”;
• Avoid the biggest mistake service firm owners make when getting their business ready to sell;
• Structure agreements to include the one sentence you need in order to sell your business for a premium.

If you want to come to one of the workshops, register before September 9 using the discount code “Blog” and you’ll save 25%.

Register for the Chicago event on September 29&30.

Register for the Toronto event on October 2&3.