The key man discount can take a zero off the value of your business. Find out why and how to avoid this trap when selling your business.
In this episode of Built To Sell Radio, you’ll hear an interview with Jeff Davis, who sold his business Legal Artworks back in October 2014. Learn how Jeff got to the point of only going into the office once a week, how he avoided the ‘key man discount,’ and why he didn’t sell his business to the highest bidder.
About Jeff Davis
In 2014 he successfully sold his medical-legal trial presentation company to a Bio Tech out of Michigan so he could dedicate his life to helping other entrepreneurs and CEOs grow their businesses by facilitating roundtable groups and other events designed to help entrepreneurs and CEOs be more successful.
About Legal Artworks
- Legal Artworks is a ‘medical legal trial presentation company,’ which is a litigation support company that helps trial lawyers visually communicate their cases.
- The Legal Artworks staff is made up of medical illustrators, animators, graphic designers, and interactive programmers.
- The clients of Legal Artworks are law firms practicing in personal injury, medical malpractice, and nursing home negligence.
- Legal Artworks was started in 2003 and sold in 2014.
- At the time of the sale, Legal Artworks had clients in 34 states.
Triggering Event To Sell
- Jeff had gradually removed himself from the business to where he had limited involvement.
- Jeff believed that Legal Artworks had the potential for significant growth and that this was an attractive selling point. .
- Jeff identified individuals who had sold similar businesses and picked their brains. He then hired a broker to sell the business.
- One of the things Jeff did to make Legal Artworks sellable was to get himself out of it.
- The ‘Key Man Discount’ is when the buyer feels that the business will not be the same without the key man or woman, and thus discounts the offer.
- As a business owner, it is important to ask yourself, ‘How long can you be away from your business without it negatively affecting the business?”
- Jeff identified 12 growth opportunities for Legal Artworks and more than 100 potential strategic buyers.
- He sent out 100 teasers with NDAs, which led to conversations, meetings, and soft offers.
- The best position you will ever be in to negotiate the terms of a business sale is if you don’t care if you make the sale or not.
- Jeff’s advice is: Don’t wait until you are ready to sell your business to put it up for sale.
- Legal Artworks sold to a biotechnology company that created software for trial lawyers. The multiple was just under five.
- The personality of the owner/investor played into Jeff choosing who to sell to.
- Jeff filtered his decision through the question “Will I be happier?”
- The higher offer to purchase Legal Artworks involved more time and more involvement.
- Jeff was required to be onsite at Legal Artworks one day a week for three to nine months and to stay on as an advisor.
- The deal involved Jeff taking a portion of the new business in shares. This meant he took the money and instantly invested into the business.
- The company was private but is in the process of becoming publicly traded.
- The deal was structured so that there was an amount at closing, an annual amount for three years, and an amount of shares in the new business.
Links to Resources Mentioned
Click to Tweet
Want to Increase the Value of Your Business by Up To 71%?
Take the 13-minute survey and get your Value Builder Score
The Value Builder Score was inspired by the book, Built to Sell. Complete the questionnaire and instantly get your Value Builder Score out of 100. Companies with a score of 80+ typically get offers that are 71% higher than average scoring businesses.
Get Your Score Now It’s free and 100% confidential.