Getting the Price You Want for Your Business - You're the Boss Blog - NYTimes.com

Getting the Price You Want for Your Business - You're the Boss Blog - NYTimes.com

June 21, 2010, 7:00 AM
By BARBARA TAYLOR

ING Financial is running a clever ad right now featuring two guys who carry around their target numbers for retirement. One has pinpointed exactly how much he needs to save for retirement, while his neighbor hasn’t done any planning at all and totes around the number $GAZILLION.

Business owners frequently take a similar approach to the number they would like to get when they exit their businesses. Some sellers do their homework, research the value of their company and determine how the market will view what they have built. Others simply fly blind, hoping they’ll get their number when the time comes to sell.


I recently asked John Warrillow, author of the book “Built to Sell: Turn Your Business Into One You Can Sell,” why business owners seem to have such vastly different attitudes about selling. “I think people tend to view selling as representing one of two things: remorse or freedom,” Mr. Warrillow explained. “The latter group tends to think of selling in terms of providing the freedom to be able to do things they’ve put on the back burner for years.”

Mr. Warrillow’s new book is a quick read at 157 pages. It follows Alex, the fictional owner of a small ad agency, who confides to his mentor that he wants to sell the business only to be told that it’s unsellable. Ted, the mentor, tells Alex to devote two years to the process of turning his existing business into one he can sell.

About halfway through the book, Ted asks Alex what price he wants for his ad agency. The question is brought up in chapter seven, while chapter eight — aptly titled “The Number” — has Alex going through the mental process of deciding what he wants, then figuring out what level of sales and pretax profit his business would need to show to support his desired asking price. The remainder of the book shows how Alex gets what he wants.

Mr. Warrillow said he had two reasons for writing the book. For one, he had a similar experience with a business he owned, a boutique consultancy specializing in market research on small businesses. “I had an M.&A. guy tell me that my business was unsellable at the time,” he said. While running the company, Mr. Warrillow encountered his second reason for writing the book: he saw that while the number of business owners wanting to exit was growing, relatively few businesses are successfully sold. “According to Minneapolis-based Barlow Research, 60 percent of today’s small-business owners will reach age 65 in the next 10 years,” said Mr. Warrillow, who lives and works in Ontario. “Over the next decade, a lot more businesses than usual will be for sale.”

Compare the coming wave of ownership transfers with the success rate associated with selling to a third party. According to Mike Handelsman, general manager of BizBuySell, only 20 percent of businesses listed for sale in 2009 were sold successfully. That’s why it is vital to do the necessary planning to extract maximum value. Regardless, Mr. Warrillow is quick to note that retirement may not be the most realistic benchmark for arriving at your number.

“Financial planners do a disservice by asking business owners how much money they need to retire and using that number as the price they must fetch for their business” said Mr. Warrillow. “Most business owners I know are bored within six days of selling their company.”

His advice: “Create a sellable business, communicate it effectively and the market will tell you what it is worth. If you like the number, sell it and go start another business — or travel or start a charity or coach your kids’ Little League team. Just don’t whither away into retirement obsessing about whether or not you’ll outlive your money.”

Unfortunately, the $GAZILLION guy in the ING commercial seems to be the norm among business owners. Rather than take a planned approach to turning the illiquid value of a business into meaningful personal wealth, many owners simply decide to see what they can get on the day they’re ready to sell.

The failure to plan causes many advisers to shake their heads. A quote on one of Mr. Warrillow’s recent blog posts from an M.&A. professional reflects a common sentiment: “If you have $200,000 in your investment account and a business worth $3 million, why are you meeting with your investment adviser annually yet rarely meet with someone who can help you value and grow your largest asset?”

Do you have a plan in place to get your number?

Barbara Taylor is co-owner of a business brokerage, Synergy Business Services, in Bentonville, Ark.