Getting into a business is often easier than getting out. That’s mainly because our identity and finances become so intertwined with the business that it’s hard to separate them. This came to mind as I talked with three different folks this past week who wanted to get out. So, without trying to be all-inclusive, allow me to share some personal observations about exiting the business.
Most businesses for sale don’t. They don’t sell, that is. I’ve seen estimates that only 35 percent of the businesses for sale actually sell. What happens to the others? Mostly, in my opinion, owners start taking out more than the business earns, the business atrophies financially, and the owners downsize to dust. Then someone locks the doors and walks away.
The Value Equation
Another reason businesses don’t sell is owners have some unrealistic expectations about price. As I’ve noted in previous articles, most businesses are valued (sold) based on earnings. So, if a good business earns 20 percent income before owner compensation, and if most small businesses sell for about three times earnings (the average is really 2.8) then 60 percent of sales is a good rule of thumb (3 x 20% = 60%, which really shows up something like 58 percent in the data).
But this isn’t a way to value a business. That’s because I assumed earnings were 20 percent. Most of the time earnings are less. Sometimes they’re more. There are also other reasons to explain why what a business is worth is more complicated than this simple rule of thumb.
However, there’s a place for the rule of thumb.
It’s highly improbable that a printing business with $1 million in sales would sell for $2 million. That doesn’t mean it won’t, just that there would really have to be some special circumstances for it to do so. Realistically, under good circumstances, the shop would sell in the $600,000 range.
Sellers often have unrealistic expectations about the length of time the business will take to sell as well. It’s not like real estate. In the best of markets it can take two to three years to sell, and frequently longer. So typically, if your business broker is bringing you two or three potential buyers a year, they are doing well.
So sellers shouldn’t be too fast to blow away any potential buyer. You need to relax that hard-liner negotiating stance as you’re not haggling over a press or the price of paper. There aren’t that many buyers. This is especially true when the seller gets lucky and gets two or three quick inquiries, so they start thinking there are tons of buyers. There are not.
Another thought is that the overall price a seller gets for the business isn’t as important as the cash you get. Huh? I’ll give you $100 for the business, but pay you $200,000 a year for four years as an advisor for a total of $800,100. Isn’t that better than getting $300,000 over three years for the business?
While these arrangements require the close scrutiny of a professional tax advisor, my point is whether you get $100 or $300,000 for the business is secondary to the total amount you get to deposit in your account. I can’t tell you how many deals have gone bad because the owner is dead set on getting a specific price for the business rather than the amount of cash the deal yields.
A final thought is that directing from the grave is a common ailment. Owners want to continue to direct the business even though they don’t own it. Mainly, this occurs with people issues, although it also often occurs with specific accounts. The seller wants to make sure Henry is cared for or that the Smith account is given special pricing. And those feelings are natural, but not warranted. Even though the seller may finance some of the purchase price themselves, the seller should always collateralize the transaction. And if you have good enough collateral, what the buyer does with the business isn’t really your problem.
There are a few thoughts that came to mind about the business sale. Hope they help.
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 firstname.lastname@example.org. Connect on Facebook and LinkedIn and follow his tweets at www.twitter.com/tomcrouser.