"REALISTIC EXPECTATIONS"
- By Stephen
J. Kerr
When seeking to buy a business or sell a business, like with
everything else in life - it pays to have realistic expectations.
Bringing a business owner's inflated sense of value for his
company down to earth and deflating the buyer's inflated concept of how much company his
money will buy, is one of the principal jobs a business broker performs.
I do not really blame entrepreneurs for placing a high value on
their company. Often when they go to sell their company it is the first time they have
ever done it, and they have no prior experience in how to set the value, besides with 20
years and all their fortunes tied up in their business, a seller is apt to place a higher
value on his business than anyone else. Likewise, when putting what may be a substantial
amount of their net worth on the line to acquire an ongoing business, an investor will be
seeking to obtain a company with the maximum amount of cash flow for his/her invested
dollar.
However, if any transaction is to take place between buyer and
seller, both will have to have a firm grip on their expectations. In most good business
transfers, neither party manages to get everything that they wanted. The seller may feel
that he/she should have be compensated a little better for the past 20 years of their life
and the buyer may feel that he has put more cash at risk than maybe he would have
preferred. Neither party may get everything that they wanted, but both buyer and seller
should feel satisfied with the price and the agreement.
A word of caution to business owners looking to sell their
companies, for the highest price. Don't look for easy answers when seeking a valuation of
your company. If it took you ten years to build up the value in your business, it will
probably take somebody a few days to tell you how much to ask for it. A friend of mine has
a definition for the term "Rule of Thumb": "An inaccurate way to make a bad
guess."
Also, if you set an arbitrary price for the company in your head,
you had better be prepared to carry it around up there for a long time. Because the market
and the attraction of the business influences the price, the cost of capital influences
the price, the degree of risk and terms of payment influences the price ... almost
everything about the sale impacts the price except the arbitrary figure in the seller's
mind. The foundation for a successful transaction price is what is fair and reasonable and
what another can afford to pay to purchase the business and not be totally at risk.
On the other hand, buyers and investors often hold unrealistic
demands on how large a company they expect to purchase with their ready capital. By and
large a buyer can purchase a company with annual sales of about three times the capital
they have to purchase it. For example: a buyer with $500,000 cash may purchase a modestly
successful business with $1.5 million in annual sales. A word for buyers working with
outside investors - get your backer's commitment in writing, or better, in a blind pool
trust, before you go out shopping. Often, when you finally find the perfect company to
buy, your financial partner's priorities have changed and the money is no longer there.
No successful sale of a company should ever be disadvantageous to
either buyer or seller. Each party has a personal obligation to cut the best deal that
they can, but be realistic. The best deals are. |
