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True Story – The Danger of The Wrong Business Valuation When You’re Selling Your Business

By Trevor Wilson

One of the big areas that’s been troubling me lately is the knowledge that many business exits are being derailed by the business owner turning down valid offers from potential buyers.

But why is this?

The answer, more often than not, is the seller has a preconceived idea of what their business is worth and quite often it is unrealistic or not what the market is willing to pay.

The following TRUE STORY illustrates this point … and shows how damaging it can be not only to your business but to your personal life, when you have the wrong set of expectations when you decide to sell your business…

NOTE: For your information all names in this story are completely fictional but the story is completely true. I also thought even though this business is based in North America the situation is equally relevant to the UK market.

In this case the buyer received a solid offer to purchase the printing business of Dave Johnson. The buyer offered him $285,000 for the business and said he had arranged all his own financing. The best news was the buyer could settle within 30 days.

There were the typical arrangements to be made, including Dave staying on for a period of time to train, but all in all it was a very clean and fair offer. At least that is how the accountant, the broker, the lawyer, and the author of this article. We all advised Dave to accept the offer.

Despite the feelings of the accountant, the broker, the attorney, and the candlestick maker that the offer was fair, there was one individual who was adamantly opposed to the offer—Dave.

“I can’t believe someone is making an offer that low. It’s an insult. I’ve worked to build this business up over 14 years, and so has my wife, and I can’t believe someone is only willing to offer me $285,000 for a business doing almost $1 million in sales,” he said. “Hell, I would rather just shut the doors and walk away than to sell for that small amount.”

Some of the Valuation Details

Dave reacted the same way as so many other owners who have decided in the past couple of years to get out of their business. They react in anger or frustration after realising that the business they have worked so long and hard to build isn’t worth what they had been counting on for retirement.

Dave and his wife simply refused to believe the numbers that were being presented and the valuation approach that was being used. Although he strongly disagreed with the valuation, Dave was unable to provide a logical formula to justify the $400,000 price tag he had placed on the business.

First, Dave kept referring to the business as a million dollar business because it had done $1.1 million in annual sales in 2005, but then began to experience, like so many firms, a slow decline in sales.

The facts at the time the offer was made (2011) were the business was producing $805,000 in sales and there was no assurance whatsoever that sales would ever return to 2005 levels.

Valuing Future Potential?

To be clear, Dave’s mindset was that a new owner could easily get the business back over $1 million. “Someone with the right talents, especially in sales and digital technology, could really take this business to the next level,” Dave said repeatedly.

But Dave didn’t understand he couldn’t expect to benefit from the talents brought to the firm by a buyer. In essence, you are expecting a buyer to pay you extra for the talents he or she is bringing to the table. That’s not likely to happen.

Well, Dave told everyone they were crazy even though he was reminded that he would also get an additional $56,000 after settling up all assets and liabilities. He then proceeded to list the business with another broker for the asking price of $450,000.

Obviously, if you have convinced yourself that $450,000 is a fair asking price, then any offer of $300,000 or less, no matter how thoughtful or justified it might be, would still be interpreted as an insult. So Dave’s reaction wasn’t a big surprise.

The ongoing problem was Dave’s inability to financially justify and explain why he thought his asking price was reasonable. When asked to explain how a potential buyer could pay himself/herself a salary and have enough money left over to make the payments to Dave over a three to five year period of time, he just shrugged it off. “Not my problem. I did it, so should a new buyer.”

Apparently, Dave, like so many others, thinks that a buyer should not necessarily expect to withdraw a reasonable salary as a working owner while paying off the business. Well that just doesn’t compute, at least not for intelligent buyers.

Still Waiting and Waiting…

As you know Dave turned down what was considered a legitimate purchase offer. The buyer ended up buying another printing firm in a nearby community. For a while, Dave stopped talking to the broker and was angry with all concerned. The original broker was equally upset and he stopped pushing or promoting Dave’s business.

Worse, with the economy still very soft, and with his growing reluctance to sink anymore money into the business, sales for Johnson’s Printing & Graphics were going to drop considerably below the $800,000 mark for 2011—the first time it had done so in 10 years.

The Personal Impact

Dave and his wife had planned to spend that summer up at their lake cottage, but instead seemed to be working harder and harder just to keep sales where they were. Payroll was once again getting harder to make, and at the time they seemed to be arguing more than ever before. It’s easy for divorces to be on the cards when money expectations or life expectations are not met.

Get The Right Business Valuation

If you’d like to avoid this situation in your business life we’ve created a benchmark valuation service that will not only give you a realistic valuation but it will also show you how you improve it before you exit.

If that interests you and you want to avoid ending up like Dave please click on the link… How To Get The Right Business Valuation & Improve It

 

Editors Comment: This story is a shortened version of the original article. To read it please click here…