Selling a Business When It’s Not For Sale:
The Value
14 March 2022: Selling a Business When It’s Not For Sale: The Value
Anyone who has been following this blog for any period of time knows the importance, when selling a business, of knowing how the market will value that business prior to bringing it to market. Now imagine being approached by someone that wants to buy your business – when it’s not even for sale – and you have no idea what it’s worth. The buyer’s in the proverbial catbird seat.
Thinking about that scenario for roughly five seconds should clearly illustrate the wisdom of having your business valued periodically. Yes, it might be a minor pain in the patootie and cost a couple of bucks, but it will not only put the owner of the business in a stronger position if someone like us shows up “out of the blue” saying we represent a buyer, but it will also give the owner a pretty good sense, at any given moment, of their personal financial condition
Selling a business when it’s not for sale requires a level of preparation that few business owners ever think about. Why? Because people think this is a rare event.
It’s not. It happened to me and, as we wrote last week, it’s happening more and more and we thought it appropriate to discuss what a business owner should be ready for – just in case it happens to them. This is the second in a multi-part series about what to consider when you find yourself selling a business that was not for sale. In this post, we discuss “The Value”.
Selling a Business and Driving a Car
I recently came across a statistic that, in retrospect, was not really surprising. It appears that, when polled, eight out of 10 drivers believe themselves to be “above average”. In fact, more than half are of the opinion that they are “exceptional” drivers.
I posit that anyone who has spent more than an hour driving in any even moderately-populated area would opine that seven out of those eight are certifiably delusional. Five minutes on YouTube watching “idiots in cars” should demonstrably prove that point.
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Well, a similar condition exists among business owners. The vast majority have an exaggerated opinion of the value of their business. And the smaller the business, the more exaggerated the owner’s opinion of its value. This often leads to several predictable outcomes, none of which are good.
First, if the business owner ever actually receives any offers – a long shot – they are “insultingly” low. Second, the business languishes on the market for years and likely never sells. And finally, when professional talent is brought in – us – we are the bearers of bad news.
To us, it makes no sense whatsoever to bring a business to market unless you have some idea what its value is. We never take on an engagement to sell a business unless a legitimate valuation has been done – and we advise the brokers in our network to think long and hard about doing so if they value their time.
When a business owners is approached by someone that wants to buy the owner’s business, the owner must have some idea of the business’ value in order to have the most basic conversation. So, what constitutes value? And is there anything you can do to increase that value?
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What Constitutes Value?
Well, the business’ financial performance, obviously; the answer to the question you’ll get from every financial buyer, “How much will this business put in my pocket?” (Strategic buyers will be interested in that, as well, but they’ll have other questions that are at least as important.) But there are many other aspects of the business that make up value.
A trained and reliable workforce is certainly one. If you have a couple of key employees, are they locked up with employment contracts? They better be, because a buyer will apply a discount to value if there’s any risk of any of the key players leaving.
Contracts to provide the business’ products or services into the future is another. A buyer that sees contractually-guaranteed revenue for some period of time post-sale, will pay a premium because such future cash flows have current value.
Clean and comprehensible financials add value. You want to make it easy for a buyer to buy. If the buyer has to call in a forensic accountant to get a handle on the books, you can be sure the business’ value will suffer. And it may suffer exponentially. Financial statements that raise questions rather than answer them have a tendency to cast doubt on everything else the seller claims.
Even such a mundane aspect as a clean and orderly workplace can add value. Buyers want to be proud of the business they own. If they buy one that needs to be cleaned up, another slice of value gets chopped off the price.
Is the equipment in good shape? Will some of it need replacing? If the business leases its space, are there at least three and preferably five years remaining on the lease? Is that lease assignable or will the buyer have to go through a burdensome and stressful dance with the landlord? If that’s required and the lease terms change for the buyer – never in the buyer’s favor, by the way – the business’ financial performance will suffer – as lease costs go up, earnings go down – and the business loses value.
There’s a ton of ways a business can lose value simply as a result of the owner’s “sins of omission”. Likewise, there is a ton of ways to maximize a business’ value. A professional business broker, one with the proper training, can far more easily spot problem areas and ways to maximize value than can a business owner who is usually too close to the business to identify, let alone address these issues.
The Bottom Line
When it comes to selling a business, maximizing its value would, it stands to reason, increase the seller’s proceeds at sale. The fact that some business owners try to sell their business themselves – without the advice and guidance that the professionals bring to table – goes a long way toward explaining why so many businesses don’t sell.
The DIY business owner would be wise to consider that negotiating a Two or Three Million Dollar offer is like going to court; you could represent yourself but it’s generally much wiser to hire a professional. If you’re approached by a potential buyer and you have no realistic idea what your business is worth, you stand a good chance of getting beaten up during any subsequent negotiations.
As if to underscore that point, I read something recently about a couple of studies that suggest that hiring an advisor can add up to 20% to the selling price of a business. And if that’s not motivating enough, remember this old saw from the annals of the legal profession: “A lawyer that represents himself has a fool for a client.”
And speaking of negotiations, that is the topic of next week’s post on selling a business when it’s not for sale.
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.
Joe
Searching For…
We have a buyer for businesses in the US west and southwest providing the following services: nursing, therapies, hospice, palliative care, adult day care, and attendant care services with between US$750,000 and US$4 million in discretionary earnings
If any of you know of something that might fit, please let me know.
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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) of which there are fewer than 1,000 in the world. He can be reached at jo*@Wo*******************.com