Robert (not his real name) is ready to sell his business. During our recent call to discuss the process, he described himself as “done, done being a business owner.”
Robert took over the business from his father 20 years ago. Though he didn’t say it, I got the impression that being a business owner wasn’t Robert’s preferred career choice. I’ve seen this phenomenon before, when someone is essentially forced to take over a business from a parent it usually doesn’t end well.
Over the years Robert has made enough money to comfortably support his family. “Getting my kids through college was my big objective,” he told me. “With that behind me, I want to sell this business and go work with my brother-in-law who is a home builder. I am ready for something entirely new.”
We then moved to the topic of valuation. For the past few years, Robert’s business has had annual revenue of $4 to $6 million. After Robert takes a modest salary each year, the business runs at break even. “Can you sell a business that doesn’t make any money?” he asked. “Yes,” I replied, “if we can find a buyer that focuses on the revenue, not the profit.”
Robert loved that concept until I explained how it happens. Selling a business on top-line results means it must be sold to a direct competitor. Said this way, the best buyer for a business that isn’t profitable is another business that can integrate the seller’s customer base into theirs. Now, this doesn’t mean the business valuation will be based on a multiple of revenue, it just means the type of buyer will be a competitor.
“Gosh, I’d hate for my competitors to know I was trying to sell, they could use that against me next time we’re bidding against each other.” “That’s the risk,” I said to Robert, “but what other type of buyer will find value in a business that is not able to generate profit?”
These are uncomfortable conversations, to be sure. No business owner wants to put their business at risk during the process to sell. But when the business has strong revenue but no profit, the best shot at a good buyer is the direct competitor. After all, the competitor is the company that has the most to gain from the seller’s customer (revenue) base.
Robert asked for a few days to think through his decision. I don’t know if he’ll take my advice or wait a few more years to sell. However, unless by waiting he can figure out how to make the business profitable, he might only be postponing the inevitable.
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. Jim is the author of Home Run, A Pro’s Guide to Selling a Business. https://www.amazon.com/Home-Pros-Guide-Selling-Business/dp/1599329239 . 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 principles above are true, but the names and fact patterns are changed to preserve the parties’ identities.
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