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

Businesses for sale – have business owners altered their price expectation?

October 5th, 2009

The economy has not been doing well for the last year, some businesses have been able to cut back on costs and staff and been able to remain profitable but at considerably lower levels than in prior years, some businesses have thrived in tough times but many businesses are losing money.

Some business owners are thinking that they should cash out and sell their business while it is still a going concern but have they changed their expectation of the value of their business?  Business owners always want to believe that their business is worth more than it really is, same as your house, you always believe that it is worth more than the identical house next door.  The difference is that the price of the house next door will give you an idea what your business is worth.  Since all businesses are worth different amounts, the business owner has nothing to compare it to.

Some business owners work backwards, this is what I need to retire on regardless if that is not what they have been earning from the business.  Some believe that they can sell their business to their competitor at triple the market price because all competitors are willing to overpay for their business.  Unfortunately, this is not how businesses operate.  Successful entrepreneurs are successful because they make good decisions and do not over pay for the business.  They will walk from an opportunity because the price is too high.  Many business owners do not realize that there is a risk to take over their business.  Not all customers will stay.  The number that leave must be factored into the purchase price.  Are you willing to pay for something that will not stay?  In poor economic times, the purchaser is taking on your business risks.

Many owners refuse to believe that there is a risk to acquiring their business.  Some business owners believe that the assets should be valued at fair market value, the goodwill is worth double of what it is,  they want the tax benefit of selling shares of the business and someone is willing to pay double the market price.  If a company is losing money, the new owner must take the risk that synergies will stem the losses however there is a cost to integrate the two companies together and that could take one to two years to fully digest the acquisition.  Business owners who are selling their business refuse to consider that there is a cost to integrate the two businesses and assume that all synergies take place on day one.

In my opinion, many business owners are continuing to believe that their business is worth more than it is.  They do not realize if the competition does not buy them, there are no synergies if an independent person buys the business therefore they will offer a considerably lower price then a synergistic buyer.  If you are losing money, is the vendor dealing from strength or weakness when they put their company up for sale?

It is human nature to try to get the best price for your business but if you don’t play your cards correctly, you could end up with a lot less than you thought if you become too greedy.   If you are extremely greedy, no one may  buy your business and it could fail and you end up with nothing.  I saw that many years ago, the owner thought that he could get $17 million for the business if he sold to a competitor.   The owner continued to operate the business for an additional four years until the business went bankrupt.  What did he lose for staying too long, the $17 million plus whatever shareholder loans which did not get repaid and any bank guarantees that may have existed.  The loss in this case was much greater than the $17 million that was turned down.

Filed under: Uncategorized — Gary Landa @ 8:43 am

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