The Unsellable Business

June 23, 2011

Here is an all too common scenario:  a business is profitable, been in business for 15 years and the business earns for its owner $150,000 - 200,000 per year in normal years, a little more in good years and somewhat less in leaner years.  Overall sales volume is flat to slow growth.  As the years go on, the owner is starting to look forward to more of a life of leisure and wants to sell the business and move to retirement.

Every sale of any type, whether it is a widget or a company, is first and foremost, about the buyer and what the buyer’s needs and desires are.  It is not about the seller.  Why would someone want to buy this kind business--a business that just keeps the owner fed with, admittedly, an executive level income?

The answer is that a buyer would only buy a business that just keeps the owner fed is if the price were particularly attractive or if there was something about the business that has a synergy or creates a specific opportunity for the buyer.  Examples of these types of synergies or specific opportunities include:

  • The buyer can roll the acquisition into existing operations to reduce cost structure and consolidate management--This would be the example of a the acquisition being made by a competitor or a company in the same business in a different or overlapping geographic market.
  • The buyer has a method to immediately improve profit.  This might be because they already have access customers to which they could immediately sell the acquisition's products or services
  • The buyer is a competitor that wants to eliminate a competitor and cherry pick the business’ key employees, customers and assets.  Additionally, with less competition, the buyer may very well be able to increase their margins through higher prices and through getting greater price discounts on higher volume raw material purchases.
  • The buyer sees some specific value in the business assets such as real estate, trademarks, market positioning, patents or other intellectual property and is willing to pay a premium for it.
  • The acquirer believes that they can make an operational change in the business through the application of its technology or management methods that can really have a dramatic impact on the profitability.

In short, strategic buyers are the only likely buyers to pay an attractive price for the business because they see the business as an opportunity to achieving a bigger strategic objective.  There are not many sane individual buyers who would want to pay money upfront or sign a personal guarantee only to buy a job for themselves.

For many small businesses owners looking for a buyer for their business, the absence of these types of conditions dramatically reduces the number of interested buyers willing to pay more than a token amount of cash in an acquisition.  As a practical matter, if your business is not generating more than a few hundred thousand dollars a year, the chance of finding a buyer is dangerously low if these conditions are not clearly present.

The problem presented here is also compounded by the number of baby boomer owned businesses coming on the market over the next 10 or so years as the boomer business owners reach retirement age.  This supply of available businesses combined with the recent financial downturn that has made investors and lenders much more conservative.  In essence, it will be harder to find a buyer because there will be more businesses available (more supply), fewer buyers (less demand), and less risk capital available --in other words, there is a perfect storm brewing on the horizon.

So, what's a business owner to do?

  • Get bigger so that there is greater more free cash being generated making the business more attractive to a non-strategic buyer (a cash flow buyer)
  • Grow your market share
  • Make operational improvements to lower costs, improve customer value, and competitive advantage
  • Make changes to become attractive to a strategic buyer
  • Build a stronger brand and pursue an intellectual property strategy.
  • Make the business run on "remote control" profitably so it can either become a financial investment for a buyer or a passive income source for the current owner
  • Get comfortable with the idea of selling the company for less cash at closing combined with creative owner financing.

In summary, the improvements necessary to attract buyer interest and perhaps fetch a premium price are also not simple window dressing that can be bolted on at the last minute.  Making a business truly attractive to a buyer who is willing to pay a premium is something that owners should be working on for years before they intend to sell.  Designing and implementing change, and demonstrating the positive results of that change that can be factored into a selling price do not happen overnight.


Entrepreneurs: Don't Hire Sales People In Your Own Image

April 26, 2011

There are many ideas about these overlapping terms, but generally speaking sales is considered a subset of business development with business development considered more strategically focused and sales considered more tactically focused.  All sales is business development but not all business development is sales.  The nature of the buyer's buying process and the company's sales proce...

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