Sell­ing with cer­tainty

The Smart Manager - - Reading Room - By terry h mon­roe

Be­fore any­thing can be bought, sold, or trans­ferred, the buyer and seller must first de­ter­mine, and then agree to, the in­trin­sic value of the ob­ject. Busi­ness trans­ac­tions are no dif­fer­ent.

a seller’s view of val­u­a­tion

His­tory and ex­pe­ri­ence tell us that there is usu­ally a dif­fer­ence be­tween the value a buyer places on an ob­ject and the value a seller will place on the same ob­ject. There­fore, the suc­cess, or fail­ure, of any busi­ness trans­ac­tion be­gins and ends with whether the buyer and seller can find a com­mon value for that ob­ject. And, that com­mon value is usu­ally some­where in the mid­dle.

Busi­ness own­ers gen­er­ally con­fuse the value of the busi­ness with their de­sire to walk away from the sale with a spe­cific amount of money in their pocket. So, they ul­ti­mately end up ask­ing a price for the busi­ness that is based more on their feel­ings than on an ob­jec­tive es­ti­mate of what the busi­ness is worth to a prospec­tive buyer. Or, worse yet, they think in terms of how much money is owed against the busi­ness, which has ab­so­lutely noth­ing to do with the value of the busi­ness. How­ever, this type of val­u­a­tion of a busi­ness is more com­mon than you might think.

When I first be­gan sell­ing main street busi­nesses such as re­tail shops, cab­i­net man­u­fac­tur­ers, ser­vice com­pa­nies, and the like, I would be­gin the val­u­a­tion process by de­ter­min­ing what I thought the busi­ness was worth. I would then ask the busi­ness owner what they thought it was worth. More than 50% of the time, the busi­ness owner’s value equaled a lit­tle more than what was owed on the busi­ness. When I asked them how they came up with such and such price for the busi­ness, their re­sponse was al­ways that it was how much they needed to pay off the busi­ness and have enough money left to re­lo­cate, buy an­other busi­ness, or hold them over un­til they could get a job.

Don’t fall into the trap of think­ing your busi­ness is worth what is owed on it or what it will take to get you out of it and moved on. This idea and the real value of the busi­ness are not the same. Be sure you have an in­ter­me­di­ary who will be forth­com­ing and hon­est about the true mar­ket value of your busi­ness.

To fur­ther com­pli­cate mat­ters, there are even sub­cat­e­gories of buy­ers and sell­ers who don’t agree among them­selves on the value of a busi­ness. This is be­cause dif­fer­ent types of op­er­a­tors have dif­fer­ent busi­ness mod­els and over­heads; thus, they see dif­fer­ent profit pic­tures. All of this may fac­tor into the value a per­son will place on a busi­ness.

Gen­er­ally, own­ers don’t know

how to ar­rive at fair mar­ket value. Un­re­al­is­tic own­ers are the big­gest rea­son why deals fall through. The num­ber-one rea­son most sales do not get com­pleted is that the seller is un­re­al­is­tic about the value of their busi­ness. Get the facts and un­der­stand the re­al­ity of what busi­nesses like yours are sell­ing for in the cur­rent mar­ket. Never be­lieve any­thing you read in the trade mag­a­zines, or what you may have heard from street talk as the gospel re­gard­ing val­u­a­tions, be­cause no two sit­u­a­tions are the same. Val­u­a­tions are de­ter­mined by many dif­fer­ent fac­tors.

Fair mar­ket value can be de­fined as “the price a will­ing seller and a will­ing buyer, both pos­sess­ing com­plete in­for­ma­tion, agree on; when there is no un­due pres­sure to act on ei­ther side.” And of course, fair mar­ket value will be in­flu­enced greatly by the econ­omy, avail­abil­ity of fi­nanc­ing, and the num­ber of sim­i­lar busi­nesses for sale in the same mar­ket.

We like to say that valu­ing busi­nesses is like work­ing with Jell- O. It is very hard to get your hands around the busi­ness be­cause the busi­ness is al­ways chang­ing. A com­peti­tor may move in across the street and change the busi­ness land­scape. Con­versely, a com­peti­tor may move out and leave you with more cus­tomers. Per­haps your city de­cides to re­build the road in front of your store. The time it takes for the con­struc­tion to fin­ish will cer­tainly im­pact your busi­ness.

The most re­cent ex­am­ple of this type of change is one where the clos­ing of the sale was sched­uled for a Fri­day, and on Thurs­day, the state high­way de­part­ment showed up and be­gan con­struc­tion to in­stall a new turn me­dian in front of the busi­ness, which closed one of the busi­ness en­trances. Ul­ti­mately, this meant there was an ad­verse change in the busi­ness and the value of the busi­ness. This was why the trans­ac­tion did not close— be­cause the busi­ness value changed overnight.

There are many vari­ables to con­sider in de­ter­min­ing the value of a busi­ness—too many to list here. The point is, noth­ing stays the same. Change. Change. Change. So, what we are search­ing for is what the busi­ness is worth to­day. Not last year. Not next year when they put in the new sub­di­vi­sion or build a new fac­tory across the street or when a com­peti­tor comes out with a new in­no­va­tional prod­uct that changes the land­scape of the in­dus­try. Think of new en­trants like what Ama­zon has done to the re­tail busi­ness or how dig­i­tal me­dia has changed the land­scape of mag­a­zines and news­pa­pers—and cam­eras. What is your busi­ness worth to­day?

The value of a busi­ness is like a fi­nan­cial state­ment that a bank would have you pre­pare be­fore it will con­sider giv­ing you a loan. With a fi­nan­cial state­ment, the banker learns what you are worth to­day. Ba­si­cally, it is a snap­shot in to­day’s mar­ket of your present value.

You’ll need to an­swer the fol­low­ing ques­tions be­fore you can ar­rive at the fair mar­ket value of your busi­ness.

what do the num­bers say?

Look at the in­come and ex­pense num­bers for the past three years. Why? Buy­ers are look­ing to pur­chase an in­come stream and want to see what the busi­ness has been do­ing for at least the past three years. Have the sales num­bers been trend­ing up or trend­ing down? All busi­ness own­ers have goals to con­tin­u­ally in­crease sales, thereby in­creas­ing the net profit of their busi­ness. A suc­cess­ful busi­ness will show in­cre­men­tal sales and prof­itabil­ity con­tin­u­ally, year af­ter year. How­ever, there are some­times sit­u­a­tions, which a busi­ness owner can­not con­trol, that will af­fect the sales and prof­itabil­ity of the busi­ness, stop­ping the pos­i­tive trend of in­creas­ing sales and prof­itabil­ity.

Fair mar­ket value can be de­fined as “the price a will­ing seller and a will­ing buyer, both pos­sess­ing com­plete in­for­ma­tion, agree on; when there is no un­due pres­sure to act on ei­ther side.”

The pre­ced­ing is an ex­cerpt from Sell­ing With Cer­tainty: Straight­for­ward Ad­vice For Cash­ing In On The Full Value Of Your Busi­ness by Terry H Mon­roe pub­lished by Green­leaf Book Group Press and ©2018 by Clay­ton In­vest­ments, LLC; pub­lished with per­mis­sion from the au­thor.

Terry H Mon­roe Green­leaf Book Group Press 2018, 160 pages, Pa­per­back

Newspapers in English

Newspapers from India

© PressReader. All rights reserved.