Are You Selling a Business or Selling a Job?
If you’re a business broker about to meet a business owner that may become a client, you’ve got to ask yourself a fundamental question. To wit: Will you be selling a business or selling a job?
The answer to this basic question will define your likely buyer and goes to the heart of how you’ll market the business,
What’s the difference, you ask? To put it simply, if the business you’re trying to sell has discretionary earnings of, say, $75,000 and the owner is working 60 hours a week, you’re selling a job.
There are plenty of examples of this kind of “business”, most notoriously, Subway fast food sandwich restaurants. Outside of the major metropolitan areas, Subway stores average just under $500,000 in revenue. After expenses, the average net profit of a single Subway restaurant is reported to be about $40,000, roughly 8% of sales.
The owner of that store is likely working at least 50 hours a week (though in reality, probably more). This comes to something between $15 and $16 per hour which, as I write this, is less than the minimum wage in San Francisco, California, and Seattle, Washington, and it is scheduled to become the minimum wage in New York, Denver, Ontario (Canada) and other cities around North America between now and 2021.
Now, I don’t mean to pick on Subway. In fact, I’m quite fond of their tuna subs but, you’ve got to be a multi-unit owner to make any serious money with Subway. That fact notwithstanding, thousands of individuals have bought Subway sandwich shops over the years. And many thousands will continue to buy them. It’s a business, yes, but if you’re selling a Subway, you’re really selling a job.
People Buy Jobs
There is nothing wrong with selling a job. People buy jobs all the time. They think they’re buying a business but they’re really buying a job.
Why would they do this? Well, passion, for one thing.
Many people are passionate about something they do or something they want to do whether it’s baking bread, making sandwiches, helping older folks fixing cars or any of a million other things. The owner of the business you may be hired to sell was probably one of those people when he or she started or bought the business you’re about to meet with them to discuss selling. There are many, many buyers out there just like your possible client, the seller.
Millions of people want to “work for themselves”. There is a certain pride and status in owning a business, however small. In many cases the business buyer becomes an employer; people work for them. Setting aside the sleepless nights worrying about making payroll, for many business owners this is a very fulfilling aspect of business ownership.
And millions more want out of the job they have. It’s drudgery. The boss is a tyrant. They’ve got no control over anything. They’re just another cog in an ever-turning wheel. They have no control over the direction of the ship they’re on – and many times they think they could steer that ship better. “If I owned this company, I’d…”
Some of these people are buyers and if you take an engagement that involves marketing a business that is really a job, you need to know where they are and how to connect with them.
Marketing a Job
Well, you’re really not going to do that, are you?
You’re marketing an opportunity! You’re marketing the chance to “be your own boss!” You’re marketing an opportunity that represents freedom, responsibility, pride, dignity, self-respect and self-confidence. This resonates with millions of people in countless circumstances around the world.
Think of the number of small franchises that have been oped and that continue to open. Yogurt shops, pest control, home care, garage organizers, closet organizers, locksmiths, junk haulers, moving brands, senior care, handyman services and the list goes on and on. There are hundreds of brands and tens of thousands of franchise units. Few of them are making serious money. Single unit owners have, for the most part, bought a job.
And, as I often point out, every business that does not fail will be sold. Each of these franchises will be sold by the original franchisee and probably sold several times over its lifetime.
Does the Seller Know?
But here’s the real issue that you must deal with when working in the Main Street market especially the lower end – the “Mom and Pop” end – of that market. Does the seller know what he or she is selling? You need to have the conversation.
In a situation where the discretionary earnings are basically the owner’s compensation, there is, for all intents and purposes, no discretionary earnings at all. Some of my colleagues disagree with me on this point but if all that’s left over after all the bills are paid is enough to provide a minimum wage to the owner, I will argue that a minimum wage return does not rise to the level of discretionary earnings.
Your conversation with the seller has to include a meaningful discussion of the Three Essentials:
- The business must generate enough profit to pay the buyers (or their hired managers) reasonable salaries with which they can support their families.
- The business must generate enough profit to pay for itself. Specifically, pay off the note(s) the buyer used for the purchase.
- The business must generate enough profit to provide a return on the buyer’s investment. Specifically, a return must be calculated on the buyer’s cash injection or down payment.
When someone buys a job, that business may provide #1 and possibly even #2. But it’s unlikely to provide all three.
Business owners, especially the owners of small businesses – those with transaction values of less than $1 million or so – often have an exaggerated opinion of their business’ value. If their business is generating $75,000 for them annually and they say they want $250,000 for it, ask the Ultimate Question: “Would you buy this business for $250,000? Would you pay $250,000 for the opportunity to work 50-60 hours a week for $20 an hour?
What Does All This Mean to the Business Broker?
Again, this in no way is to suggest that representing such businesses and sellers is something to avoid. The seller of a Subway restaurant or a BBQ Cleaners or any other small business needs the assistance of a qualified professional business broker as much as the three partners that would like to sell their $20 million furniture wholesale and distribution business.
And the buyers of these businesses need the help of a business broker, as well, to find and vet the available opportunities.
But the broker has to explain to the seller that, after removing the emotion, what they are really selling is a job
Our course, The Basic “How-To” of Becoming a Business Broker”, teaches how to become a professional business broker.
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The Bottom Line
Your first objective is to get the seller to understand what they have to sell. Your second objective is to describe the likely buyer.
If you have any questions, comments or feedback on this topic – or any topic related to business – I want to hear from you. Put them in the Comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a profitable week!
Joe
#business #businessacquisition #sellabusiness #becomeabusinessbroker #businessbrokering #businessvaluation #MergersandAcquisitions
The author is the founder of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) and can be reached at jo*@Wo*******************.com