Are you building a business to sell or is it just a hobby?
Are you building a business to sell or is it just a hobby? On a weekly basis I get calls from business owners asking the value of their business as they have decided it’s time to sell. The owner explains the history of the business and what their business does, which is important as I want to understand their business, their different revenue streams and then importantly, the cash flow the revenue streams are generating after all business expenses are paid.
A lot of business owners then go into detail about the potential and opportunity to a new buyer if they were to buy and own the business which is also good as a business needs to have good potential for it to be attractive to a buyer. For example, the other day I had a call from a business owner that had a shoe repair business that he worked and owned for 35 years and now he was planning to retire and so wanted to know how many buyers I could introduce to him. One of my early questions was to ask what his gross sales each year had been over the last two years. After giving me the number and I asked the cost of his rent and other expenses the business was making a little money but an obvious question was how many buyers were interested in buying a shoe repair business and just as importantly, how would a new buyer learn the skills of repairing shoes?
Similarly, I received another call from another business seller that was repairing Apple products including iPhones and iPads. Initially I thought this must be a great business as there are so many Apple products being sold that there must be a market for a lot of repairs. After I found out that he was working full time in the business plus two of his children and making about $35,000 per year it was clear this wasn’t a true business but a hobby as Apple simply did not sell parts and provide enough training for this business owner to build a viable business.
A final example comes from another business owner with a retail business. The business was doing well but during our conversation she explained that she was taking a lot of cash from the business to support her sister as she was in ill-health. The amount of cash being taken meant no one knew the true performance of the business and so it was not viable to sell as there was no way to substantiate how well the business was performing.
These are just three examples to show some of the variables that prevent a business from selling. The economy is always in motion. Because it’s in motion and because of new technologies, things are in constant change. If you own a business then you have to move with the change or pretty soon you may not have a business. One of my examples above is directly in the technology business and you’d think would profitable and growing. However, that was not the case.
In my final example, the business owner was unintentionally eliminating any chance she had to sell her business. As she said to me, she was looking for a good business broker that could explain to potential buyers how well her business was doing. Unfortunately for her or perhaps fortunately for me, I wasn’t that business broker as I can only represent to the market for the seller the numbers on the tax return. The tax return is also the place where third party lenders will go to decide if they are willing to finance a loan.
If you own and operate a business please manage it and treat it with the disciplines it requires. These include good financial records and statements, processes and procedures in current training and employee manuals, awareness and use of technology to enhance the business, strong sales and marketing activities and complementary operations so the business is strong and has potential to grow so the owner can sell the business when the time is right and get the best price possible.
Selling a business comes with many challenges. It’s a complex process to truly break down and explain to a potential buyer how and why a business is operating, where it’s at now and critically, where it can go in the future under a new owner. Fear is the number one emotion as humans we deal with on a daily basis. Buyers are full of fear deciding whether they want to take the risk to become a business owner and many drop out of the process. Did you know that only about 2% of the US population owns a business? It’s the American Dream to be a business owner however if the take up rate is only 2%, you have to work with many business buyers before you find someone that’s willing to handle all that risk.
If you own a business and its time to do something else that’s more important than what you are doing now, give me a call and let me help you start the journey to your new destination. You should have plenty of questions as there are many steps to take. Give me a call now on 916 570-2674 and let me answer those questions for you.
