Over the years I have met with scores of underperforming business owners and have had to deliver the bad news that it is close to impossible to get an acceptable (to the owner) price for his/her business given the industry standard of valuing businesses at a multiple of cash flow. With little cash flow, even using a generous 4x or 5x multiple, a projected selling price is woefully light to the owners of such underperforming businesses. Earlier this autumn, back to back, I encountered two ordinary looking companies that seem to give some hope to the possibility of selling underperforming businesses.
Both of these businesses had very nice fixed assets (equipment) which the sellers felt they might have to liquidate as buyers had been scorning their underperforming operations. What both companies also shared were old owners who loved their businesses, but had resisted selling them for years and years (one owner is 73 and the other 85!). Both had recently lost their spouse, and their businesses were now truly struggling, performing worse than ever.
So what did we do? We were open and honest about the underperforming nature of each business, advising prospective buyers that these opportunities should not be considered by a buyer expecting a solid cash flow from day one. Instead, we offered both businesses (in completely different industries) for an aggressive price, one that was both well above orderly liquidation value and the amount a typical financial buyer would value these businesses on a multiple of cash flow.
We patiently told buyers that if you do not see the value in these businesses and the potential that exists for a motivated, aggressive buyer, then these businesses are not for you. If you cannot take solid assets, a long company history and a nominal existing cash flow and make quick, easy changes that the older sellers never dreamed of (starting with creating websites and visiting customers), then maybe you should buy a franchise where every management decision is spelled out in the franchisee manual. These sellers, sadly, are easy acts to follow, and given the aggressive offering price, both their businesses represent rare opportunities for immediate growth and enhanced cash flow with limited downside risk.
Predictably, many buyers loved the businesses, but could not get over the paltry cash flow so they declined. However, we were thrilled on how many prospective buyers saw what we saw and aggressively pursued the opportunities. We are pleased to report that one of the business is currently under contract, and we believe the other should start receiving letters of intent soon.
So the surprising punchline is that if you own an underperforming business, check with an experienced business broker to see if your company, like the two described above, might be more salable than you think. We certainly hope so.