Quick Consultant: Sellers Place Too Much Value on "Future Potential"
Selling a business depends on your strategic planning process and pricing strategy
It’s no big surprise, considering the state of the economy, that many printers are giving serious thought to selling their businesses. Fortunately, at least for some of these sellers, there are indeed buyers (mostly other printers) who are looking toward acquisitions as a method for surviving and growing their own businesses. That’s the good news.
The bad news is that too many sellers are being unrealistic in their expectations. A few months ago during a discussion about business valuations, one printer angrily said that before he would sell his business for what “some expert was spouting,” he would close his doors. I just smiled and shook my head. It can be very frustrating to get owners to examine their businesses from the eye of the buyer.
The fact is that, while most buyers are willing to pay sellers a fair price for the business, they are not willing to pay a seller—nor should they be—for the “future potential” of the business.
As a general rule, sellers should not expect to be rewarded for the talents and expertise that may be brought to the business by a new owner. If the business has potential for future growth and profits, then that potential should already be apparent in an examination of current and historical financial statements. If the business has grown steadily over the past eight years, has produced a net owner’s compensation of 16-20%, has little debt and a good team of employees, then it can be argued that the business has good potential for the future.
On the other hand, you can’t operate a business for eight years, demonstrate an erratic pattern of growth with lower than average industry profits, take out only a modest owner’s salary, show significant debt on the balance sheet, and have a highly paid, under-performing team of employees, and still claim to a buyer that a significant portion of your asking price is based upon the potential of the business.
The more untapped the potential of a business, the lower its value. It is one thing for a business to have a bad year or two; it is a far different thing to expect a buyer to pay you top dollar based upon a history of lackluster performance. In some cases, your business may have far more value if you continue to run it than it will if you try to sell it on the open market.
Another option is to forget about selling the business as an ongoing entity and try to sell you customer list or “book of business.” How much is that worth? Just as much or as little as an owner and buyer are willing to agree to—and not a dollar more.
A Very Discouraged Seller
I was recently hired by a national franchise to assist them in valuing one of their operations. The owner of the franchise, Frank McDonald, sent me three years worth of financial data plus a fairly detailed history of the business. Sales grew during the first four years of the business, but in the last five years sales have dropped off dramatically. Yes, the economy can be blamed for some of the decline in sales, but certainly not the entire decline.
About three years ago Frank decided, against the strong advice of the franchise, on three major changes he wanted to make in his business—changes that seemed to doom his operation and cause its value to drop considerably.
First, despite the fact that the business achieved only $505,000 in sales in 2008, Frank decided to hire a highly paid production manager, at a salary of more than $50,000. Why Frank wasn’t performing this task himself was beyond me. I know of very few firms of this size that can afford the luxury of a production manager. That’s the primary role of the owner, isn’t it?
Second, Frank also hired an outside sales representative at a salary of $40,000 plus a generous commission. Once again, Frank or his spouse should have been performing this function. It is a rare company of that size that can afford the luxury of a highly paid outside sales rep.
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