Case Study: Selling a Business Involves More than Price, Part 2

What is a business worth? We usually focus on this when we considering retiring, but too often we focus on this number only. As we saw last month, price isn’t perfect, although it’s a good start. There are other issues affecting price. Here are some of them.

The seller’s motivation is extremely important in the final price. Sometimes you want a high price and sometimes you want a low one. Consider a building. Are you valuing for tax purposes? If so, you might want a low value. If it’s for insurance, you might want a higher value in case it burns down.

An Objective Viewpoint

For most of us, the theory is to predict the arms’ length selling price. Even here, the math formula by itself is not enough. Do you have plenty of money in the bank and are you willing to wait to get your price? Or are you selling under pressure, as in a divorce dispute?

Even if we knew of the prices all businesses sold during the past 10 years—and we do—your business could be worth more or less than the average, which is the best of the worst and worst of the best. (BizComps is one resource for this information; Pratt’s Stats is another.)

In one case, a business was listed for $6 million and sold for $3 million. What’s more, it was an all-cash transaction, which is unusual. In another, a $300,000 business required the owner to hold paper; commonly referred to as a land contract in many areas of the country.

And then there are factors beyond our control. A business could be worth $1 million, but if general credit is tight, potential buyers can’t get the deal financed. So $1 million businesses could sell for less because the owner has to cash out, perhaps because of an illness. In other cases, the owner can wait.

Outlying Factors

These factors and more result in a range of values. Then the valuator picks a specific value, based on your specifics. Will you get this price? Not necessarily, because negotiations are involved. You know…“What do you want?” “I don’t know. What will you give me?”

The “market clearing price” is the price where you get the maximum value. If your price was higher or lower, you would either have product left over or sell out early. Applied to business sales, it’s the maximum price you can get and still sell (nothing left over) without negotiating.

So, a valuation can provide you with a specific value (price) as well as a range. But it still is subject to other factors, some of which are not under our control.

Also time is an issue. It’s not unusual for a business to be on the market for three years. So the owner’s hardest task is to list the company and continue increasing sales and earnings so that maximum value will be obtained. A slumping business always sells for less.

If you fixed it, would you still sell? That’s my litmus test for owners when they call. If the answer is, “No, if it were fixed I wouldn’t want to sell,” then fix it yourself, don’t sell it.

What Comes Next?

Now, a final thought. What are you going to do after you sell the business? This is a toughie. As an owner, you’re an established entity. You have value. You have status at the Lions’ Club. Once the business is sold, many feel a significant loss. That is, unless you have already planned what your next career will be.

Think of retirement as nothing more than your next job, whether it’s volunteering, traveling, or woodworking. And it isn’t temporary. When you want to do whatever you want to do more than what you are doing now, then you’re ready to move on. Unless you have that, then stay there and fix the business.

Those are a few of my thoughts on selling the business and retirement. As an elderly lady told me when I remarked on her most active lifestyle, “Getting old ain’t for sissies.”

 

Tom Crouser is chairman of CPrint International, teacher of business courses at CPrint University, and principal of Crouser & Associates, Inc., 235 Dutch Road, Charleston, WV 25302, (MyPRINTRresource.com/10004688), 304-965-7100. Contact him at 304-541-3714 or tom@crouser.com. Connect on Facebook and LinkedIn and follow his tweets at www.twitter.com/tomcrouser.

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