Swedish entrepreneurs are losing out on billions

In October, Valentum assisted Pernilla and Niclas, owners of RevolutionRace (Fritidsfabriken) in the sale of a minority stake of their company to the private equity firm Altor. While I cannot disclose the final price, I can say that before the process begun the company had received bids which were roughly half of the highest bids that came in during the transaction process. A process in which a large number of potential investors were invited. Oftentimes, entrepreneurs—but not Pernilla and Niclas—choose to accept a bid from a buyer who has contacted them proactively. Unfortunately, the likelihood of receiving the highest possible value and the best possible terms in such a case is very low, which, on an aggregated level, results in entrepreneurs losing out on billions.

When discussing value in transaction-like situations, irrespective of whether it concerns simple products or companies, many people tend to focus on the price tag alone. Of course, the purchase price is important, but there are many other factors that contribute to a successful transaction. A professional advisor contributes not only by driving up the price, but also by finding the right buyer. This is especially important for entrepreneurs who do not want to let go of their life’s work, but are looking for a partner who can help develop the business. The same goes for family businesses where the children have chosen a different career path rather than continuing in their parents’ footsteps. The challenge is to ensure the financial stability of coming generations while also finding new owners who can lead the business into the future.

50% of people selling their business use a professional advisor. In the housing market the figure is 90%.

A series of in-depth interviews were conducted in the spring of 2017 by an independent think tank on behalf of Valentum. The interviews showed that more than half of all entrepreneurs sell their business without hiring an advisor as project manager. In comparison, more than 90% of all sellers in the housing market hire a real estate agent to secure a better deal. One of the most common explanations as to why entrepreneurs do not use a specialised sell-side advisors is that they are not familiar with advisory services and the effects which they can have on the outcome of the transaction.

To be more specific, in 2016 the total value of all private companies which were sold for SEK 50 million or more exceeded SEK 10 billion. Taking the result of the survey into account, thereby assuming that only half of the sellers hired an advisor, the total value of transactions that were carried out without an advisor amounts to SEK 5 billion. In the processes which we have been involved in throughout the years, the difference between the lowest and the highest bid has generally been greater than 100%.

“2.5 billion is lost, every year”

If we apply the theory of probability, the bids would on average end up in the middle of our interval, meaning that 50% of the value, or SEK 2.5 billion, is lost every year.

Selling a company is a complex process that requires thorough preparation, analysis and substantiated argumentation for the inherent value of the company. The transaction industry is growing rapidly and having updated information and recent experience is crucial in order to achieve a good outcome. Frequent buyers, for whom acquisitions constitute an important part of the business, use advisors when engaged in transaction processes.

We do not like seeing entrepreneurs missing out on the best possible deal. In an increasingly competitive market, Sweden has to be able to ensure that successful companies are allowed to keep thriving. A bad deal for the entrepreneur is often a bad deal for Sweden as we risk losing competitive businesses with great potential for future growth.

That is why, we at Valentum have a vision

We want all entrepreneurs to know what a professional advisor can do for them, and that no entrepreneurs selling all or part of their company are losing out on some of the value which they have helped to create. As entrepreneurs ourselves, we know how much work it takes to build a business.

If we are successful, it will pay off. For entrepreneurs and for everyone else.