3 Mistakes Business Sellers Make

We recently met with a buyer who was looking at a manufacturing business with an operating income of $100,000. The seller wanted 3X (arbitrary multiple with no valuation). The business paid no rent, as it operated on the seller’s property (meaning the buyer would need to pay for a move, then start paying rent). With the cost of the move and the cost of the rent, a large part of the $100k a year would be wiped out, leaving the buyer on the hook for a $300,000 purchase (if a bank would even have financed such a deal). Let’s look at all the mistakes the seller made that led the buyer to run away from this deal as fast as he could.

1. My Business is Worth X

So a 3X multiple for a manufacturing business is in range, but the problem was the multiple was based on false cash flow. The seller somehow managed to overlook that a buyer would have to pay rent, reducing the cash flow, and that the buyer would need to pay to move all the equipment, incurring a one-time cost that would devalue the business. In all likelihood, the seller just decided that 3X “sounded good.”

Remedy: Get a professional valuation done. A valuation would have caught these problems and delivered a realistic number to the seller. The seller could then have decided if that was an acceptable number to list at or whether he/she wanted to put in the work to get a better valuation.

2. Dealing with Tire Kickers

While it’s attractive to “save 10%” on a FSBO business sale by cutting out a business broker, what you get to deal with in exchange are a lot of tire kickers. Why?

• Business brokers have a list of financially-qualified buyers asking to be notified whenever a good business becomes available. FSBO sellers do not.
• While FSBO sellers may have spent years successfully running a business/businesses, they have likely spent no time whatsoever selling a business, so they don’t know what a serious buyer looks and sounds like, leading to potentially endless meetings with no conclusion

Remedy: Hire a broker. You’ve spent a good part of your life building something of value. Now, right before you cash out, you want to DIY and pretend you’re back in startup mode? Save your time and sanity and outsource this to the experts.

3. Understating Time Spent in the Business

“I only spend about 5-10 hours a week in the business.” If we had a dollar for every time we’ve heard this, shall we say, wishful thinking…

Business owners consistently underestimate the amount of expertise they’ve accrued over the years and while they may have built a system which makes the business less reliant on them, very rarely do we list purely absentee businesses.

The other aspect of the “5-10 hours a week” myth is the underlying assumption: “Because I have key employees in place without which the business would implode within weeks.” Have sellers taken care to get to know the aspirations of their key employees enough to know they won’t fly the coop in a sale? If those employees might do just that, what are the backup plans in place to put other team members in place?

Remedy: Forget everything you know and put yourself into the position of someone buying the business who has never worked in your industry. What sort of time would it take to get up to speed, and then what kind of timeline would it take for that buyer to get to consistently reasonable hours?

Are you in the process of making any of these mistakes but still want to sell your business? It’s not too late to get professional help. Give us a call today.