Here are common examples of business seller misconceptions and the more likely realities.
“They have the money.”
Are you judging a book by its cover? I’ve run into this if the potential buyer is a local celebrity, mover and shaker, drives a nice car, etc. None of these status symbols mean they can write a big check or borrow the money to buy your business.
“I will get paid upfront.”
Many deals are owner-financed instead because (1) most buyers can’t write $1 million and higher checks and (2) banks rarely loan on intangible assets. Unfortunately, that also means you need to make sure the business will turn a profit after you stop working there or you won’t get paid.
“It’s worth annual sales.”
This is someone who thinks if their annual sales are $5 million, their business is worth $5 million. Some businesses sell for 1 x sales and higher but don’t get your hopes up until forward-looking cash flow, growth, and risk support that value and a serious buyer proposes a number at that value.
“My friend got 10x EBITDA. My business is worth that too.”
Do you have all the details about your friend’s business, the structure of the deal, and the buyer? A conversation over lunch isn’t sufficient. Unless they are willing to share their documents, it’s unlikely you will understand how the deal was done. It’s possible they don’t even fully understand it.
“My daughter/son/competitor will buy it.”
Have you talked to them? Often, the conversation was superficial. Have real conversations with children and competitors if they are your exit plan. If the answer is “yes,” you still have a lot of work to do. If it’s “no,” you have even more work to do to find replacement buyer(s) and execute your plan.
Parting Thought
Once these become part of your belief system, it’s hard to get them out of your head. My clients that avoided disappointment were realistic and thoughtful. They asked a lot of questions before they formed opinions. Often, the number in my valuation report was a pleasant surprise. It doesn’t guarantee a sale at that value but it’s better than getting attached to a plan and a number based on misconceptions.
Josh Horn, CPA, CVA
Horn Valuation
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