One of the most important questions you’ll need to be able to answer when working with buyers is “What do I get when I buy your business?” The answer is quite simple.
I. The Assets
What does a buyer get? The assets, the tangible items included in the transaction. This could include real estate, vehicles, build-out, inventory, furniture, fixtures, and equipment. It is all the stuff the buyer gets the transactions is completed. Because this is the item most easily understood by the buyer, there is no excuse for not being prepared to present this to the buyer.
What about Liabilities?
Depending on how the transaction is structured, liabilities may or may not transfer to the new owner. It’s safe to assume, the buyer will pay less to offset liabilities, real or perceived, included in the transaction.
II. The Transferable Goodwill
What is transferable goodwill? It is the goodwill that remains after the seller is gone. It is quantified by the continued financial performance of the business after the sale. Because this is the financial benefit to the buyer for purchasing the business, the more we can remove speculation on the part of the buyer, the more (money) you can expect at the closing table.
What about Risk?
Unlike Liabilities that can be quantified, i.e., there’s a loan outstanding for $700,000, Risk is about perception. The buyer says, “What if…?” Some of these “what ifs” can be reasonable and we can prepare them. Preparing for reasonable “what ifs” is part of the preparation process. Unreasonable “what ifs” identify buyers who are not yet ready to purchase a business.
III. The Associated Quality of Life
After purchasing the business, the new owner, hopefully, will strive to continue and grow the business. What will the buyer need to do to accomplish that? If it’s a donut shop, he may be required to go to bed early (and get up early). If it’s a valve repair business, he may need to spend some time sweating in a fabrication shop. And, if it’s a well-organized business with sales, operations, and management in place, he may need to be available by phone while he’s at the lake house.
Several years ago, we were trying to sell two businesses. They were very similar in terms of assets and financial performance. In fact, both had adjusted earnings of right at $250,000/year. Here’s how they were different. The owner of Company A lived out-of-state and came in town twice each month. The owner of Company B worked 60 to 80 hours per week. Guess which company sold for more. A better exercise is this: Guess which one never sold.
Your answer to “What do I get when I buy your business?” will provide the logical and emotional justification for purchasing your business. Lack of preparation in this phase of selling your business will most likely result in several months of frustration and failure.
Contact us today to schedule of free consultation of how your business will be valued by buyers.