Selling a Business: “Value” vs “Need”
26 September 2022: Selling a Business: Value vs “Need”
Selling a business is the ultimate pay off for years of hard work. But in too many cases the sale is sabotaged by the business owners themselves. In our more than 20 years experience, one of the most common ways owners torpedo their chances of a successful sale is by looking at what they “need” from the sale rather than what the sale is likely to provide them.
What I mean by this is that owners have a tendency to determine what they want to do next – start a new business, sail around the world, move to Macau for the nightlife, start a mushroom farm – rather than determine what they’ll be able to do next.
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They then establish a price that they want for their business without giving the slightest thought to their business’ actual value.
Anyone who has been following this blog for even a short period, knows that establishing a price for the sale of a business without knowing its market value is the main reason that more than 80% of businesses that come to market don’t sell.
That statement would seem to be at odds with our long-used tagline that “Every Business That Doesn’t Fail Will Be Sold. Every One!” But it’s not a contradiction because the businesses that don’t sell when they initially come to market eventually will – but not until the reason they don’t sell has been corrected.
In this case, we’re talking about the owners eventually – and in most cases, reluctantly – reducing the price.
Our course, “Learn How to Value and SUCCESSFULLY Sell Businesses“, teaches you how to accurately value and successfully sell businesses.
Don’t Miss Out on the Coming “Silver Tsunami“!
When we point out to a business owner that the price they want for their business is significantly higher than how the market appears to value it, we often hear, ‘that’s what I need.”
But we have to point out that a buyer – the market – doesn’t care what the owner needs. The buyer cares about a reasonable return on their investment; a return that reflects the risks inherent in small business ownership, the demands in the owner’s time and the competition for the owner’s investment capital.
Business ownership is a risky way to live – which is why the vast majority of people are employees.
Two of the most serious and currently high-profile risks are financial – interest rates – and economic – inflation. Others risks include strategic, liability and reputational. Yet another is one that every person on the planet should, at this point, be familiar with: business interruption risk.
Though Covid 19 may be a once-a-century event, the riots currently en vogue in numerous progressive American cities must be considered. Even months-long street closures for infrastructure projects pose enormous risks for businesses.
Potential business buyers – even those with only a modest level of business sophistication – are still investors. When they invest, they want a return on their investment commensurate with the risk that investment entails. Small business ownership is one of life’s riskiest investments and therefore warrants a high rate of return.
Business ownership – at least until the business has grown to the point of having a management time in place that will allow the business to thrive even if the owner decamps for Katmandu to spend a couple of months living in a yurt, sampling a wide variety of some of the regional agricultural products – takes an enormous amount of the owner’s time. It’s not a 9 to 5 job.
I’ve owned and actively managed several businesses in my career. The smallest was a small sole proprietorships with only a handful of employees. The largest (though still small) was one with over $1 million in revenue and 25 employees. Each of them monopolized my time.
A business buyer/investor must be able to justify the time investment the business will require; if not to him or herself, to their spouse and children who will, without doubt occasional complain about the lack of time the family will be getting. The buyer’s spouse must be onboard.
When selling a business, the business owner must be cognizant of the competition.
At any given time, there are thousands of businesses for sale and the selling owner has to recognize that all those other selling owners are the competition. Buyers cast their nets wide when looking for opportunities that present the best chance of achieving a handsome return on their investment given the potential risks and time required to oversee that investment.
But a seller must also remember that “competition” is not limited to other businesses.
Business buyers are, at bottom, investors. When we’re trying to make the case for the businesses we’re selling, we have to consider that, from the stock market and real estate to precious metals, artwork or even to more arcane financial instruments such as interest rate swaps, there are dozens of markets – other than businesses – competing for the investor’s capital.
The Bottom Line
When selling a business, the business owner must consider whether what he or she “needs” coincides with what the market is willing to pay. And in order to figure that out, they have to know what the market is willing to pay.
The only way to know this, of course, is to know what your business is worth – before coming to market.
The market value of your business will be reflective of not only its earning power but the inherent risks of owning a business. Will the price you “need” allow buyers (investors) to realize a return on their investor sufficient to offset the perceived risk? And will the price you “need” be competitive with the other opportunities facing the buyer?
In our experience, the is “no”.
That answer underscores the importance of knowing what you business is worth. The cost of a professional business valuation will be dwarfed by the amount of time and money you will spend trying to sell an over-priced business.
I’d like to hear from you. What topics would you like me to cover? How can we tailor these posts to be more useful to you and your business. Let me know in the comments box, below, or email me at joe@WorldwideBusinessBlog.com.
If you have any questions or comments on this topic – or any topic related to business – I’d like 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 safe and profitable week.
A U.S.-based small private equity group contacted us with particular interest in pet, tech/software, membership/marketplace businesses, and B2B services with discretionary earnings of between $1 million and $10 million. U.S. or Canada based
If any of you know of something that might fit, please let me know.
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The author is the founder, in 2001, of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) of which there are fewer than 500 in the world. He can be reached at joe@WorldwideBusinessBlog.com