Don’t let this be you…

Business owners call us regularly asking for market valuations of their businesses and discussions of business sales prospects. We are always forthright as the valuations we establish are usually the benchmark prices for our listing and selling activities.

Every month or so, a prospective seller, on receipt of our valuation, tells us that (a) he was hoping for a higher valuation, and (b) that he will “hang on” to the business for another couple of years working harder to increase cash flow which of course could subsequently result in a more attractive business valuation and sale price.

Over the past 12 years, we have heard this story countless times, and I have seen it unfold successfully exactly once. So in this single instance, the seller worked hard and effectively on his business for 2-1/2 years to realize more than a doubling in valuation. We then sold his business at the new, higher valuation level, and at this writing (two years after the sale) both seller and buyer are very happy.

Unfortunately, there are scores of business owners who not only are unsuccessful in making their businesses more profitable (and therefore more attractive to prospective buyers), they often experience a back slide in revenues and/or profits. Two or three years later we are called back to compile an updated business valuation which sadly now reflects a business worth less than it was when we first encountered it. Even worse, in my business travels around Michigan every so often I find myself driving by the site of what is now a former business of a potential client. Such businesses not only didn’t accomplish the goal of enhancing business value, they wind up closing the doors, realizing only liquidation values for their once robust companies.

Now is a great time to sell or buy a business. Consider:

  • Baby boomers who made it through the Great Recession are ready to sell their businesses
  • More buyers than ever are in the marketplace looking for business opportunities
  • The number of completed transactions is rising
  • Median sales prices are up 12% over just two years ago
  • Banking, while still problematic, is the best it has been since 2008

Nevertheless, if you feel that a real world valuation (not necessarily what your CPA or financial advisor tells your business is worth) does not meet your expectations, please ask yourself the critical question: “what are you going to do differently (than what you have always done) on a look forward basis to increase the value of your business?”

To increase business valuation in any meaningful way, your business will have to show a marked improvement in profits for at least eight consecutive quarters. Do you have the skill sets, energy, drive, and patience to accomplish what my firsthand observations reflect are about 50:1 odds against you? That means there is a 98% chance that after two years (or longer) your business may not be worth any more than it is right now, and in some cases it could be worth less.

So before you say, “I think I will hold on to my business for a couple of years to enhance its market value,” please do some serious soul searching. 98% of the time not waiting to sell your business will pay off..

Contributed by Michael Greengard, Praxis Business Brokers.

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