Saleability vs. Value
We are about to breakdown the difference between a saleable business and a valuable business. What’s the difference? Well, unintuitively, a valuable business is not always saleable.
Why Your Business is Valuable But Not Saleable
Have you ever browsed Craigslist or Facebook Marketplace? If you have, you may have noticed there is an abundance of people’s most random junk on there.
And hey, we are not one to judge whether a one-armed Aquaman figurine holds intrinsic value or not. We are sure it does to the person selling it. The problem is that the number of people willing to pay for a dishevelled Aquaman is small. This smaller buyer pool will mean 1 of 2 things will happen:
- The buyer holds all leverage in the transaction, allowing them to put forward a ‘low ball’ offer.
- The seller will need to wait a long time for the right buyer to come along. This is okay for the owner who doesn’t need to sell. But this is less ideal for an owner who needs to sell it as soon as possible.
Unfortunately, this same mistake repeats itself when owners try to sell their business:
They value their business with their heart, not fact.
Who could blame them? Most business owners have poured their heart and soul into building a company they are proud of. This gets further complicated when the owner starts to think about all their relationships with employees and customers. Unfortunately, this is how we get a small-town restaurant owner trying to sell their business for $10 million.
The fact of the matter is, that almost nobody will value your business the same way as you as the seller does. This is important to keep in mind when selling your business.
They forget, nobody needs to buy a business.
It is important to remember that nobody needs to buy a business, especially yours. A buyer’s alternatives include all the other businesses for sale or simply getting (or maintaining) a job. The harsh reality is that you may not be sitting on the golden goose you think you have. Bidding wars amongst buyers do happen, but less often than you’d think. This is not to be pessimistic, however, you do need to set realistic expectations when thinking about selling your business.
This occurs often and in many different scenarios, for example:
1. The One-Person Show
- This is very common amongst owner-operated businesses. It is not uncommon for a baker to make all the baked goods at 5 AM while managing the front counter until noon. While this business may have recurring customers, a brand, and even profits – it is very difficult to sell. The reason being that your buyer needs to possess the same skillset as the operator. This means selling to another baker or finding someone who wants to become a baker.
- This becomes even more difficult the more skilled the baker is. For example, if the baker is world-renown for intricate cake designs. Then the new owner, if they wish to take over your business as is, must find someone who can achieve the same standard of outcome.
- This is the same reason that a YouTube star who is making millions of dollars per year can never sell their business. Because they are the business.
Sound like you? Here’s what to do:
The first thing you need to do is develop systems and procedures that are repeatable by any Average Joe. For example, our baker should create a step-by-step guidebook on how to develop one of their signature cakes. Next, they should try to hire someone on a 1-month contract to see if they can train them to create one of their cakes independently by the end of the month.
Why 1-month? Well, this is a reasonable amount of training you may want to provide a buyer of your business. If you can show that anyone can learn to replicate your work within a month, you will have a much higher chance of selling your business. Even better, if the contractor turns out to be a great potential employee, see if you can roll their contract into a full-time job. Replacing yourself in your business is one of the most meaningful ways to make your business more saleable.
2. The Specialist Business
- Similar to the One-Person Show, a specialist business requires a qualified individual to operate in your industry. The classic example is a professional (dentist, doctor, or lawyer) that requires a speciality license to operate their business. Just because someone is willing to buy your pharmacy does not mean they are qualified to operate the store. To sell their businesses, these professionals would have to hire out someone who is qualified.
Sound like you? Here’s what to do:
Any business that requires speciality training (acupuncturist) or a special equipment license (trucking company) creates friction to selling your business. As many buyers won’t take the time to be qualified to buy your business. Operating a laser machine for example could need a 3-4 week training session which buyers may want to avoid. Even the shortest of qualifications can steer away buyers. They want a frictionless transition where they can buy your business and start operating day 1.
If you are in this position, be honest with yourself at how long it would take someone to be qualified for your business. In the case of the lawyer example, it is unlikely someone will go to school for 4 years to be qualified. Therefore, as a seller, you could be focused on selling to right buyer, such as a legal firm who is already qualified. This means you have a smaller buyer pool but the ones who are interested would be a better fit.
Another route you can take is to train already certified staff to take on management role. This means they can be the one on your team who is willing to hold license for your entire business. As part of sale, the qualified manager could be an equity holder of the business which ultimately helps with employee retention.
If moderate effort to acquire training for business, then you can make it clear for all the steps for a buyer to be qualified. Or develop back up plan where existing licensed employees can get part in the sale and then new buyer can take over without need of licensing for the service.
One final approach is to partner with an established specialist to become the designated licensed professional for your business. This is often done in the aesthetics industry, where a ‘rotating doctor’ will work at multiple practices and only complete certain treatments on a designated day (Botox Fridays). This is usually less profitable in the short-term but will help expand your buyer pool when you do sell.
3. Inventory Heavy Business
- This is very common in retail businesses to carry a high amount of inventory. For example, many shoe stores carry a large amount of inventory to give customers more choice. Problem is, no buyer wants to buy all your pre-existing inventory. On the other hand, you don’t want to give a major discount on all your inventory as a Seller. Further, banks are only able finance a certain number of inventory costs you as a seller could lose out on a lot of your investment.
Sound like you? Here’s what to do:
This is a very common issue that is hard to overcome. One creative solution is to sell inventory on consignment basis to buyer. This way, as the inventory is sold down, you are still paid your fair portion as Seller while also reducing the risk to the Buyer.
4. Asset Heavy Businesses
- Industries such as heavy machinery rentals, construction, oil and gas, are ‘asset heavy’. This means they own a lot of expensive equipment to run their business, but this is daunting to a buyer. Since amortisation and depreciation of equipment is typically high in these businesses, it can often inflate the company’s cash flow higher than it is. As such, buyers will scrutinize the value of existing equipment. For example, if you have 5 million dollars of equipment that needs replacement in next few years, this will reduce your valuation and make your business more challenging to sell.
Sounds like you? Here’s what to do:
One strategy is to convert your owned equipment to a capital lease model, as this makes the financing of your deal less complex, and you won’t have to worry about buyer scrutinizing quality or age of equipment. By doing this, you are converting from an asset-heavy business to asset-light business, which is more attractive to Buyers.
5. Client Concentration Risk
- This is a common dilemma for niche businesses that are performing well on paper, but their revenue is concentrated to a low number of customers. For example, a Buyer will become concerned if 80% of your revenue is from 5 customers. Further, if you don’t have strong contracts with customers, there is risk of them leaving. The same applies with key suppliers.
Sounds like you? Here’s what to do:
Just like signing a prenup, prepare for worst outcome. Ensure you have contracts in place with both key customers and suppliers. This will help qualm any buyer concerns about the customer concentration risk.
Pro tip – approach these buyers/suppliers nonchalantly about putting a contract in-place. Telling them, ‘Hey I am planning on selling the business and I don’t want the buyer to think you’re going to stop buying/supplying me’ may cause concern.
Rounding-up
Overall, there is a significant different between a business valuation and the ability for it to sell. Understanding this is key to preparing your business to sell. To increase chances of finding a buyer you must recognize weakness. If you do not notice this weakness prior to putting your business for sale, this may result in taking a long time to find buyer. Or you could get less money for business than you hope, or ultimately not sell at all.
If you’re ready to get started on an exit plan for your business than check-out our private Exit-planning Community here.
