One of the biggest mistakes a business owner can make is not being realistic about the value of their business. By value, I mean the likely selling price. This can happen when the revenues and profits of the business are declining. The problem is that by not recognizing the market value, the owner holds out for a higher price that never comes, while his business is continuing to decline in value.
With the recent recession, many businesses had a drop in sales and revenues. Many are now recovering from the lower sales and profits. A business normally sells at a price based on the most recent financial results. The owner remembers what their business was worth and expects it to get back to that level. Maybe it will, but today the business is valued based on current sales and profits, not on what sales and profits may be in the future.
Another situation where owners are not realistic in their expectations is where their investment in the business is much more than what the business is likely to sell for now. This could be a business that was bought when it had higher sales and was bought at a higher multiple than it would sell for today. Another example is a franchise business that is not performing well. In both cases, today’s selling price may be much lower than the owner’s investment.
One other example is a business in a declining market. In this situation, the business sales are dropping and the multiples at which businesses in the industry are selling for are dropping also. When combined, the value of the business can drop significantly. It may be best for the owner to accept the best offer and get into another type of business.
Finally, there is the business where, for personal reasons or poor management, the sales and profits are dropping, but the owner wants to sell based on how the business used to do. A common explanation is that all the business needs is a new owner with the drive and enthusiasm that the current owner no longer has. The buyer won’t pay the seller for the efforts the buyer will make to improve the business.
In all of these situations, the owner is going to take a loss compared to their investment or what the business used to be worth. But, if the owner doesn’t sell now, the value may continue to decline and the loss will be even greater in the future. I’ve seen situations where owners have turned down, what they considered, a low offer only to close the business or declare bankruptcy, and receive nothing, soon afterward.
If you are thinking of selling, and your business broker has suggested a selling price that is lower than you think your business is worth, get an independent valuation. Usually, this will cost a small amount as compared to the value of the business. This will give you an independent opinion from an expert.
No one wants to hear that their business is worth less than what they would like to get, or need to get. But, one of the characteristics of a good businessman is the ability to be realistic. If your business is declining, failing to be realistic and accepting less, could result in an even worse outcome later.