The suspense is killing me

[marylandcrab]

While I have no issue with the multiplier, it's how they come up with the ebita that's up for discussion. A bean counter can low ball anything in their favor. You don't just look at w2's, you should look at tax returns as many small businesses don't run all money through payroll like a regular employee. Actually there is a lot to look at, a lot of ways to run numbers, it just becomes a matter of how much are they willing to pay, and how much are we willing to accept to sell.

 

[Finance Dave]

Grizz - I agree. I just said I was done. However, if dh needs to do it to be able to move on, then I'm okay with that. I have a new employee starting tomorrow so I won't even be around during the call.

We recalculated our goals without selling the business, and we figured we're on a 7 year countdown. This process got us to look at things we'd never really looked at, figured out where to tweak, made us realize how good and solid the business was and it sparked some new ideas. I would never sell unless it was really worth our while and would allow us to retire. Plus, now I have a new target to take down. They want to buy us because we have always won in every account where we were both involved. I will now go after their existing business and displace them there. In dealing with them, I now get even more why they can't beat us.

I'm probably still too emotional to just hand this business over to someone else. We were the ones who have put in all our savings to cover payroll at times, had the kids at 6 and 8 stuffing envelopes, had my mom set up a filing system, my dad (who died a few years ago) is the one who had us define ourselves and our customer service. I'm proud of what we have built, and while everyone would tell me it's just business, it's personal to me too.

So while it was like imagining I won the lottery, it won't be that easy for us.

Have you considered advertising it for sale to somone other than your competitor?

 

[Milton]

marylandcrab, Luke Johnson had a column in yesterday's (November 23, 2011) Financial Times that you should check out. He discusses the psychological challenges faced by entrepreneurs who sell their businesses.

Seller’s remorse is a common emotion. If the business does well under new ownership, then you probably decide that it was sold far too cheaply; if it does badly, then you may well regret its decline. Either way, there are grounds for recrimination and sadness.

See further It's Hard to Make the Final Exit - FT.com.

 

[marylandcrab]

Next update... we now have another company in the mix. We're moving along fairly quickly, and I'd way rather sell to them than the original company for many, many reasons. In fact I would take less money to sell to them.

Now we have to juggle the timing of the offers. Company #1 asked for more info the week of Thanksgiving and still haven't gotten back to us. The thing they asked me to do is not how my business is analyzed, which makes me think they don't quite get what we do. Their M & A dept makes a certain kind of purchase, and we're a different kind of business that they're trying to shove into a specific model.

Company #2 has a meeting tomorrow to review all of our numbers. The things they asked us for made way more sense in reviewing our business. They seem to not be valuating it the same way either. Fingers crossed, I want them to be close.

 

[TromboneAl]

I had two bidders for my company. First was clueless and wanted lots of personal meetings to discuss things. Second was knowledgeable, and we only talked on the phone.

I sold it to the second, and almost never needed to provide support. That was a good thing.

 

[Milton]

There was an article in last Thursday's Wall Street Journal: Sarah Needleman and Emily Maltby, "'The Economy Stole My Retirement': nest eggs in peril for millions of entrepreneurs in the 60s and 70s who can't sell their companies", August 30, 2012 WSJ, page B1.

I was bemused, but not surprised, to read that two of the small business owners profiled were valuing their respective companies on the basis of the amounts they "needed" for retirement. Frankly, that is not a relevant criterion for a prospective purchaser, who is primarily If not exclusively focused on the amount and sustainability of the anticipated future earnings stream.

Mr. Sullivan has struggled to sell Arguello Catering inc., the Redford City, Calif., business he started 21 years ago, at a price anywhere near the $850,000 or so he figures he needs to stop working. He reckons that about 70% of his nest egg is tied up in the 25-employee company. Its annual revenue has fallen to roughly $2 million from $3 million before the recession, Mr. Sullivan says. He has tried, without success, to boost the business's value by branching into new markets, expanding hours of operation and adding healthier menu options. He says he got three offers for Arguello this year, but they were far too low....

Judy Lawson, 69, says she would like to sell the small staffing company she started 27 years ago. She figures she needs to sell it for close to $2 million to live comfortably. But her company was hit hard by the job-market slump, and its revenue is down by about 60% from before the recession. Ms. Lawson says she continues to work 12-hour days, meeting with prospective clients sometimes until late at night. She says she can't afford to inexpand (sic) her business, which is down to 13 employees from 35 a few years ago....

Ms. Lawson listed her business for sale last year through a broker, but all of the offers she received were "insulting", she says: as little as $250,000, plus installments that would vary depending on performance. "You don't work for almost 28 years at building a company and give it away", says Ms. Lawson, adding that she won't settle for what she considers a low offer ... she hasn't taken a vacation in years because she can't afford to travel.

No disrespect intended towards either of these good people, but they need to appreciate that the market values of their respective businesses - both of which unfortunately seem to be substantially shrinking in profitability - is determined solely by what a willing purchaser is prepared to pay, rather than the 'sweat equity' they have invested (and continue to invest).

 

[MooreBonds]

I was bemused, but not surprised, to read that two of the small business owners profiled were valuing their respective companies on the basis of the amounts they "needed" for retirement. Frankly, that is not a relevant criterion for a prospective purchaser, who is primarily If not exclusively focused on the amount and sustainability of the anticipated future earnings stream.

Somewhat similar to people listing real estate for prices they "feel" their home is worth - although you obviously have a lot more personal feelings (long hours/sweat equity) in building a business over 1-2 decades, rather than a house that you have to sell to move somewhere else.

I've had various ideas to earn income over the years, and briefly looked at buying an existing business of some sort a few years back. I was honestly surprised that the common multiple is only perhaps 2x annual NET income (perhaps even lower!), depending on history/client list/etc.. I always knew that the public equity markets value companies higher than privately-held, but didn't realize the multiples were so low.

But one line that really made me shake my head:

as little as $250,000, plus installments that would vary depending on performance. "You don't work for almost 28 years at building a company and give it away", says Ms. Lawson, adding that she won't settle for what she considers a low offer ... she hasn't taken a vacation in years because she can't afford to travel.

So she worked at building a company for 28 years, earning income from it, yet "can't afford to travel" Yet she expects a stranger to buy her company for oodles more, who (presumably) also won't be earning enough from it to be able to afford to take a vacation?

 

[Texas Proud]

There was an article in last Thursday's Wall Street Journal: Sarah Needleman and Emily Maltby, "'The Economy Stole My Retirement': nest eggs in peril for millions of entrepreneurs in the 60s and 70s who can't sell their companies", August 30, 2012 WSJ, page B1.

I was bemused, but not surprised, to read that two of the small business owners profiled were valuing their respective companies on the basis of the amounts they "needed" for retirement. Frankly, that is not a relevant criterion for a prospective purchaser, who is primarily If not exclusively focused on the amount and sustainability of the anticipated future earnings stream.



No disrespect intended towards either of these good people, but they need to appreciate that the market values of their respective businesses - both of which unfortunately seem to be substantially shrinking in profitability - is determined solely by what a willing purchaser is prepared to pay, rather than the 'sweat equity' they have invested (and continue to invest).

One of the problems with selling a business is that a lot of time the value is in the owner.... and if sold it loses a lot of value....

Also, they did not say what the profits were for either of these businesses.... and if that included the cost for someone to run the business.... IOW, if the $2 million in sales business has a profit of say $50K... and the owner was not paid... and it would cost $100K to hire someone to do that job.... the business was losing $50K per year.... maybe for a long time... that means the business is worth nothing....

 

[Milton]

One of the problems with selling a business is that a lot of time the value is in the owner.... and if sold it loses a lot of value....

Agreed. I am not sure that it applies to either of the two businesses mentioned, but the fact is that most small personal services firms have little if any genuine 'goodwill' value. That can be difficult for a proprietor to swallow, but if you can't transfer the customer base to someone else, what exactly are you selling?

And as you say, if the owner has not been paying him or herself a decent wage (or dividends), then the business is more of a hobby than a profitable enterprise.

 

[rodi]

My husband's former employer planned to sell his architectural business for retirement. It was worth well over a million in 2005/2006. Had a dozen employees and lots of contracts on the books. He wanted at the high end of the value, and was trying to talk my husband into purchasing into the business. (I vetoed that - too much of our nest egg at risk.) But we'd looked at the books and determined it had a market value around a million, probably more.

Then the economy collapsed. Architecture was hit especially hard. The business shrunk until it was just the owner and my husband, both working part time. They were down to one unfinished contract, no new business being brought in. He closed the doors a little over a year ago.

Not only did he not get the million he could have, if he'd sold at the peak, he lost money paying rent on the office space, liability insurance, marketing time trying to bring in new customers.

The man is now retired... but not in the style he'd hoped for.

 

[FinanceDude]

One of the problems with selling a business is that a lot of time the value is in the owner.... and if sold it loses a lot of value....

Also, they did not say what the profits were for either of these businesses.... and if that included the cost for someone to run the business.... IOW, if the $2 million in sales business has a profit of say $50K... and the owner was not paid... and it would cost $100K to hire someone to do that job.... the business was losing $50K per year.... maybe for a long time... that means the business is worth nothing....

Most businesses sell at a multiple of sales or a multiple of net cash flow, not complex math.

 

[pb4uski]

One of the problems with selling a business is that a lot of time the value is in the owner.... and if sold it loses a lot of value....

Also, they did not say what the profits were for either of these businesses.... and if that included the cost for someone to run the business.... IOW, if the $2 million in sales business has a profit of say $50K... and the owner was not paid... and it would cost $100K to hire someone to do that job.... the business was losing $50K per year.... maybe for a long time... that means the business is worth nothing....

Most businesses sell at a multiple of sales or a multiple of net cash flow, not complex math.

While it is true that some businesses are priced based on multiples, the multiples implicitly are based on a normal level of profit, so the net cash flow to which the multiple is applied needs to be normalized to reflect the cash flow that the new owner would expect to receive and not necessarily what the previous owner received. If the owner of the subject business was not paid or underpaid then the cash flow would need to be reduced for the value of the owner's unpaid efforts before the multiple is applied. I used to work in M&A and things like this is one of the first things we would look at.

While I personally think is it foolish to base the price of a business on a multiple of sales, if the profits of the subject business are normal for that industry then it might make sense in some circumstances.