By Harry Haigley, Business Value Center, Inc
I used to be a business broker specializing in the sale of small businesses. I soon learned that two-thirds of all businesses listed for sale never sell.
Why? The business owner is motivated. He signed a contract to sell his business. The broker is motivated. He only gets paid if the business sells. And still two-thirds of the listed businesses never sell.
We call this the “Great Puzzle.” We love puzzles. My business partner, Dick Ayotte, does the New York Times crossword puzzle every day in ink. I play two or three games of on-line, competitive chess almost every morning. We are passionate about finding solutions.
So, here is how people who love puzzles think about this one. We break it down this way:
There is a triggering event for the business owner. Maybe he is just tired. Or it might be health issues. There are many reasons, but he decides that it is time to sell the business.
He hires business broker to find the buyer and manage the sale. The broker researches the sales price of similar businesses. He suggests a listing price.
Then the process stumbles.
The owner wants a price that allows him to retire, which rarely is realistic. Or, he prices by “myth and rumor.” He heard of a similar business that sold for a certain amount and clearly his business is worth more. e He wants a listing price that is wildly optimistic. He will wait for a foolish buyer.
The broker wants a realistic price. The broker does not want to wait. But a listing is a listing and the broker needs three listings so he can sell one.
The result is pricing that results in two-thirds of businesses not selling.
The process of selling a small business works best when there is an educated and experienced buyer. The buyer knows the restaurant business, for example, from years of experience. He and the seller talk the same language. Both understand a realistic price. Sometimes, they become friends. And a sale is made.
The process works worst when a buyer struggles to understand the nature of small businesses. There may be cash that doesn’t show on the business tax return. There may be tax deductions such as expensing non-business travel. This makes the buyer suspicious.
Some buyers are a “FIP” – a Formerly Important Person, often with a strong corporate management background. He may be retired, or his company may have “simplified” the corporate structure and left him without a job. He is looking for a means of controlling his future and, equally, being directly rewarded for his effort.e is
There is a clash of culture: big corporate vs. small entrepreneur. There is no common language.
There is no one answer to the “Great Puzzle.” But we believe that one possible solution is validation and documentation.
Our certified valuation reports validate the value of the business. We document our findings. This helps to bridge the gap between the buyer and the seller.
We are IRS “qualified appraisers” and nationally certified to provide valuations. We have provided certified valuations to more than 1,500 business owners.
A common problem is the future value of the business. We ask the seller to make a realistic forecast of three years of future sales and earnings. We calculate the total future net income and then discount it back to current cash value. Our reports include an analysis of the industry and a forecast of industry net income. This is a “sanity check” that helps the buyer decide whether the forecast is achievable.
Another issue is “add backs.” These are businesses expenses that a buyer would not have. These might be charitable contributions, non-recurring costs or unusually high rent. These costs are examined for reasonableness, adjusted and added-back (or subtracted from) corporate income.
The owner’s salary is examined. The salary might be low and just enough to ensure that the owner gets social security income upon retirement. Or, the salary may be unusually high. We have data on the salaries of all occupations tracked by the US Department of Labor and the State of Florida. We “normalize” the owner’s salary to amounts customary by industry and by metro area. If the salary is too high, we add the excess salary back to corporate net income. If it is too low, we reduce corporate net income to show the real cost of management’s salary.
Our focus is singular: business valuations. We are not CPAs, management consultants, financial advisors or exit planners. We do not appraise real estate or equipment, but we know full time experts who do.
We have data on the purchase and sale of more than 550,000 privately owned businesses. We use this to create market comparables for pricing.
Our reports are written so that the reader will understand why we reached the valuation amount. We work on flat fees and have never violated this principal.
We are passionate about solving puzzles. That’s why we do what we do. We are enjoying and still working on this Great Puzzle.
To contact Harry Haigley of Business Value Center, Inc:
Cell Phone # 727-510-1144. Email: harry@businessvaluecenter.com