This article are provided for information purposes only, and are not intended as legal advice.


What happens when I hold on to my business too long?

March 17th, 2009

I know of a company had a bottom line equal to 1.5% of sales.  Sales were high enough to allow the family made a good living.  A synergistic buyer was looking to acquire competitors 5 years ago and was willing to pay a price 7 times than a non synergistic buyer of the company.  There were a lot of economies of scale to justify the high price.  There was only one person who was willing to pay such a premium to the company.  The owner turned down the offer and continued to operate the business possibly thinking that this offer would be there for years to come.  The economy deteriorated, the company fell on hard times and went bankrupt.

 

Had the owner sold 5 years ago, he could have invested in term deposits, made 3% on his money and would have earned the same profits as the operating company.  When an offer is too good to be true, you have to make a business decision if it is time to sell.  Even if the owners of the company continued to operate the business under the same business conditions as five years ago, they would have had to work for 34 years to make enough profits to equal the purchase price.  If you can make 34 years in profits in one lump sum, do you look at the offer or decide that succession to a child to keep your legacy going is more important?  The owner had made enough money over the years to live comfortably for the rest of his life.  In this case, family legacy was more important than a prudent business decision. 

 

What was the owner holding out for?  In this case, holding out for a successful transition to the next generation was more important than making a good business decision.  He could have pocketed the money, waited a few years to go back into the business after the non compete expired or finance a new venture for the children.  He would have been further ahead. 

 

Every business should be for sale for the right price.  Pride, egos may get in the way of good business judgement.  When you sell your house, you always think that your house if worth more than what you got for it.  The same takes place when you sell your business.  The only difference is that there are many houses which are similar to yours in your subdivision so that you can get an idea what fair market value may be.  In a business, no two businesses are identical, different locations, customers, management etc.  You never know what your business is worth until you actually sell it.  My example above shows that greed, pride, egos can affect your business judgement and holding on for that extra dollar may result in getting nothing for your business.


Filed under: Sell a business — Gary Landa @ 8:24 am


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