Declaring Defeat, or Just Time to Retreat?

We’ve reached out to as wide a swath of potential buyers I can think of, yet no meaningful interest. It might be time to take the business off the market.

I was talking with Linda (not her real name) about the business she and her husband started in 1988. He passed away in 2014, and she had stepped in to keep the business not only running but profitable, most years. Her net income was about $300,000 the prior year, though in the past few years, net income had swung from a low of $75,000 to a high of $425,000.

Linda’s husband and I were from the same hometown and our parents were good friends. So when she asked me to help her sell her company, I was honored to do so, even though it was smaller than most of my engagements.

Before we got started, I told Linda it was going to be a tough deal to get done. I explained the swings in revenue, and the resultant profit swings, would make it hard to give a buyer comfort about future stability. Now don’t misunderstand me, Linda was a very good operator, but given the “work for hire” nature of the services the company provided, it was very hard for her to forecast, much less deliver, consistent results. Other factors that were going to make it hard for her to sell included the fact that, while she had a loyal team of employees, there was no clear #2 person a buyer could rely on. Moreover, the company did zero marketing; almost all the project work was based on relationships Linda and her husband built over the prior three decades. While the customer base seemed stable, there was no certainty about if or how it would transition to a new buyer.

Over the course of the seven months we tried to sell the business, I talked with about twenty viable potential buyers. I didn’t make progress with any of them because none were willing to consider buying a company with an uncertain revenue forecast.

Now here’s what made this even more frustrating for Linda, and me. Linda was not asking for an unreasonable valuation. Before we took the company to market, we agreed the selling price would be $550,000, which was just three times the average earnings of the past three years.

But even with a reasonable valuation, we couldn’t get an offer on the table. Linda was disappointed, but not upset. She understood the problem from the buyer’s perspective. She was smart enough to learn from this experience, so she is now working to develop a system of customer acquisition that will help her develop a more consistent revenue stream. So what appears as a defeat, not selling her business, was really just a retreat. She knows now how potential buyers will look at her business and she has the energy and time to give it another two to three years. It wouldn’t surprise me if Linda gets this resolved, and makes her company not only more sellable, but more valuable.

 

JIM CUMBEE is President of Tennessee Valley Group, Inc. a retainer-based business brokerage and transition mediation firm in Franklin, TN. Cumbee is an attorney and has an MBA from Harvard Business School. He has a wide range of corporate and entrepreneurial experiences that make him one of the most sought-after business transition advisors in the state of Tennessee. The names and fact patterns above have been changed to preserve the parties’ identities.

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Tennessee Valley Group

Jim Cumbee established Tennessee Valley Group to help business owners fulfill their dreams for life after business ownership. It’s a mission that his 30+ year career history had prepared him well for—in addition to being an attorney, transition mediator and business broker, Jim has been a buyer, seller, and entrepreneur. His broad range of experience gives him unique insight into how business buyers and sellers can achieve their goals.

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