Guest Column: If They Can Sell Pet Rocks Why Can’t You Sell Your Business For What It’s Worth?
John Martinka is a graduate of the Million Dollar Consulting® College and an expert in small business growth, valuation, and exit strategies.
If they can sell pet rocks why can’t you sell your business for what you want?
“The Economy Stole My Retirement,” Wall Street Journal August 30, 2012, stated that many small business owners want to retire but can’t sell their business or can’t sell it for the money they want. Don’t for a New York minute think it’s going to get better soon.
There will be a tsunami of small business owners exiting in the next decade. In 2011, PricewaterhouseCoopers predicted that two-thirds of businesses with sales of $5-50 million would change hands in the next decade. That’s a lot of seller competition and like the song says, “Only the Strong Survive,” or at least get their price.
From the WSJ article I noted three common topics that get in the way of selling a business for the price the owner wants and I’ve added my insight on those subjects. When they fix the problem areas and emphasize what buyers find attractive, business owners will exit with style, grace and for more money, leaving other owners wondering what happened.
Too many small businesses have a huge dependency and it’s the owner. When the owner is integral to the day-to-day operations of the business the value goes down. Owners should work on strategy, growth and vision more than making or delivering the product. Other dependencies are customer concentrations and reliance on key employees; both should be reduced ASAP.
Business buyers, of all types, never buy a business to keep it where it is. They all plan to grow and always ask if the company is scalable. Owners who don’t focus on growth and don’t have a solid marketing plan will lose. Sellers who say they don’t want to grow and are purposely holding the business where it’s at are greeted with skepticism. Buyers fear the culture is one of coasting not growing and it will take a major effort to change that culture.
Too many owners blend their business and personal checking accounts making it difficult to determine exactly how much profit there is. Selling a business? Ignore your CPA! Your CPAs job is to reduce your taxable income so flip it around and show as much profit as possible (without damaging the business through lack of investment). Your banker and buyer will love it.
Sellers don’t realize this, but since 2010 the number of business buyers has been down and their caution level has dramatically gone up. Buyers have always been a skeptical lot and the Great Recession has exaggerated that skepticism. Sellers need to present as powerful a business as they can. Buyers won’t pay for what the business did five years ago or what it might do in three years (potential), they pay based on current profits.
Every buyer and bank still asks, “Is this business recession proof?” If not, it’s going to be tough to get a good price. If it has proven to be recession proof it will sell for a higher multiple of profit than it would have five years ago.
A lot of businesses have proven to be recession proof and the most qualified (money and skills) and savvy buyers will gravitate to them, leaving the less qualified buyers to chase those companies that have suffered.
Myths of Valuation
The WSJ article quoted one owner who said that she wouldn’t sell for what she’d been offered because of her longevity, strong reputation and client base. A big valuation myth is that longevity or sweat equity creates value. It doesn’t. Value is created by profits and the more profits the higher the price.
Another myth is that small businesses sell for the same multiple of profit as large businesses (multiple of profits is the same as the price-earnings ratio used with public companies). All other things being equal, a larger company will command a higher multiple than a similar smaller business. A tip to owners, grow the top and bottom line whether it be organically or by acquisition. You’ll be glad you did when it’s time to sell.
Finally, don’t confuse salary with profit. Salary is for the job of running the company and profit is what the company makes based on the value it provides its customers. You can’t add salary to profit and apply it to your multiple of profit.
John Martinka is The Escape Artist™ who creates large exits for small businesses and helps corporate executives buy a business to escape the corporate world. He can be reached at [email protected] or www.martinkaconsulting.com.