Pricing a Business to Sell Part 1

Last week, I wrote about the large number of businesses that come to market that never sell. That post also listed a dozen or more reasons why businesses don’t sell. But it also stated that the main reason businesses don’t sell is that the price is too high. This post is the first of three planned about pricing a business to sell before bringing it to market – or more specifically, determining whether the business is worth a broker spending any time on.

Remember my oft-repeated maxim: the only reason something – anything – be it a house, a car, a business or a pound of potatoes – doesn’t sell is that the price is too high. Even damaged goods have a value to someone. Even a business that is losing money likely has some value. Granted, that value may be no more than the value of its assets, but it has some value nonetheless. Someone will pay money for those assets.

But many business, though they may have some value, are simply not worth taking on.

Pricing a business to sell is important from the business broker’s standpoint insofar as he has got to ask himself, “Is this listing worth my time?” But it is equally important that the broker determine whether the business – whatever its value – is even worth messing with. It doesn’t matter if the business is small or large; it may not be something a broker wants to try to sell.

This is an issue we go over in our course, The Basic “How-To” of Becoming a Business Broker and it is important that any broker give the question serious thought. There are only so many hours in a week. There is no sense spending time on a business that is unlikely to sell.

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Our course, The Basic “How-To” of Becoming a Business Broker”, teaches how to become a professional business broker.

Become a Professional Business Broker…

A broker needs to analyze a business from a buyer’s standpoint. As such, pricing a business to sell is an exercise in assessing the risk and the reward of owning the business. This process involves analyzing the business, its market, its financial performance, its discretionary earnings and more to get a sense of how attractive the business will be to  reasonable buyer. But analyzing a business – a potential listing – from the broker’s standpoint is equally important if the broker wants to be paid for his or her time and effort. This process involves the broker asking himself (or herself) a series of questions early on, the objective of which is to get a sense of the likelihood of success in bringing about a sale and the likelihood of being paid adequately for his or her efforts.

Where Do We Start?

The first step is for the broker to consider whether the business in question can likely be sold. This starts with a series of questions.

• • Is there a market for this business? Not for what the business does, but for this specific business. There are buyers for pizza but there may not be buyers for a specific pizzeria.
  • Are sales increasing or decreasing?
  • Are profits increasing or decreasing?
  • Will the seller participate in the financing? (Somewhere north of 80% of small business sales involve some component of seller financing.)
  • Is the business too dependent on the current owner?
  • Is there too much customer concentration?

If the broker has a modicum of experience, asking a few of these questions upfront should give the broker a sense of whether the business can be sold in any reasonable amount of time and at any reasonable price. Now, while “reasonable amount of time” is very subjective, “reasonable price” is not. Here’s an example from our files.

The Quick Analysis

One of our offices was contacted by the wife of the owner of a dental implement-repair business. The owner had had a sudden health crisis and was not expected to be able to return to work.

The business was run out of their home in a semi-rural area and was a one-man operation. It’s revenues were steady but modest – about $100,000 per year. The owner made a living but there were several aspects of the business that suggested it would be a challenge to sell.

• Even before doing the valuation, the broker could intuit that the discretionary earnings would be low and probably not cover the Three Essentials.
• The location – a semi-rural area – was unlikely to appeal to many buyers.
• The potential commission or success fee would be low. Would the broker be paid for his time?
• The minimum success fee that we recommend our brokers charge would leave the seller with minimum proceeds.
• In a one-man operation, every day the business is not operating it loses value – and the speed with which that value disappears accelerates the longer the business is idle. This fact inserted a significant sense of urgency that the broker had to consider.

Our broker called me to discuss this and I asked the question that should be asked before moving forward with any listing: “Is this worth my efforts?” Even before doing the valuation the answer was clear. No.