Would You Pay $899,000 To Buy This Business? | Forbes

by Josh Patrick

I often have conversations with business intermediaries who’s main function is to help private business owners sell their businesses. I recently got an email and had a few follow up emails about a business I found especially unattractive.

It’s not so much that the business was unattractive that got my attention. It was the brokers attitude towards the listing that I found especially disturbing.

English: Sandy Springs, GA, October 23, 2009(Photo credit: Wikipedia)

So, what’s the deal?

The business for sale is a window dressing company based in Northern Vermont. It’s been in business for a very long time and the business is managed by the owner.

It’s a good small business and provides a nice salary for the owner. He does a good job and the business has a very nice local reputation. This type of business is often called a lifestyle business. It provides a nice living for the owner but there isn’t enough profit to create any real lasting economic value.

Before I get into what I believe the problem is here’s some basic financial on this company.

Financial Information

Annual Sales – $1,300,000

Inventory – $440,000

Fixtures – $62,000

Owners Comp. – $200,000

Cash flow including owners comp – $150,000

Free Cash Flow – $50,000

Asking price – $899,000 including inventory and fixtures

Would you buy this business?

I’m hoping the answer is no. In reality there is $50,000 in annual free cash flow. If we assume the buyer will put down 20% on the business and finance the rest, the loan amount would be $719,200.

If we get a bank loan for the entire balance spread over 5 years at a 6% interest rate the annual loan payment would be $166,890 per year. That’s a far cry from $50,000 before taxes that would be available to make loan payments.

Here’s my problem with this deal.

This is where I have a major problem with many in the business intermediary business. They just don’t look at their listings as if they were a buyer.

If the broker in this case looked at the business, she would have seen that there is no way a potential buyer would buy the business. The only way, this business would ever have any value for the buyer would be if the buyer was able to dramatically increase the value of the business.

My question to the broker or for that matter any broker in this situation is why would a buyer pay the seller for what I’m going to do with the business. There is no apparent growth that’s been going on with the business. Any growth that I get will be because of my efforts, not programs the seller had put in place before selling.

Too often intermediaries put false hopes in front of their clients.

The broker for this business has put a listing out in the world. The seller is likely already counting his money and thinking that it’ll only be a little while before a buyer comes along and plunks down the full asking price for this business.

I’m hoping that you aren’t buying this anymore than I am. There ins’t going to be any buyer willing to pay this amount of money unless the selling owner is willing to hold the vast majority of the purchase price as a sellers note.

I don’t think we’re going to find a bank that’s willing to make a loan, even an SBA guaranteed loan based on the economics of the business. What’s happened is the seller now has a false expectation of what the business will sell for.

A year or two later he’ll have to start over and really think about what’s the best way for him to leave his business.

A better option

This type of business is one where a good old fashioned going out of business sale is probably the best exit strategy. It’s probably the best way for the selling owner to get the most out of the value that’s in the business.

The owner could buy a bunch of low priced, high margin seconds products that he could sell as part of a going out of business sale. He would like get a better price for his inventory than a liquidation sale. And, he wouldn’t have to worry whether his sellers note would be repaid by an outside buyer.

My frustration

It’s clear to me that this broker would have provided a much better service by telling the seller that the business really isn’t salable and then explaining how a going out of business sale works. The problem for the intermediary is that if the owner decided to take this route, there would be no commission for her.

This particular deal is a great example of a vendor having a conflict of interest that isn’t being explained to the customer. I’ve seen way too many deals fall apart because brokers put deals together that have no way of working out. This appears to be one of those cases.

My wish

I would love it if business brokers would ask their clients whether they would be willing to buy their business under the price, terms and conditions the seller wants to sell their business. If the answer would be no, the next question the broker should ask is, “Why would anyone else want to pay this?”

At the same time there are tons of excellent and honorable brokers who wouldn’t take a deal like this. It’s the poorly behaved brokers that make the entire industry look like one who just takes advantage of sellers who aren’t sophisticated about leaving their business.

What’s your thought about this deal? Would you blame the broker for bad faith or the business owner for forcing this deal?

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For additional information regarding Florida business sales, acquisitions and valuations, please contact Eric J. Gall at Eric@EdisonAvenue.com or 239.738.6227. Also, visit our Edison Avenue website at www.EdisonAvenue.com or my personal website at www.BuySellFLbiz.com.