GlobalBX

Misconseption 1. Purchase price should at least cover what I spent on the business
Put yourself in the buyer’s shoes (I will use this phrase a lot, so get used to it). As a buyer, you’re buying a business for the income. You don’t care much how much the seller spent on it, but rather how much money it puts in the owner’s pocket. If the owner spent one dollar and the business is generating one million dollar in profit, it will be treated as a million dollar business. If the owner spent one million dollars and the business is netting one dollar, it means that the owner wasted one million dollars, regardless how beautiful it is.    

We were approached by a classic car dealer who just recently built 30,000 sq. ft. indoor showroom with body and repair shop for restoring the classics. It took him half a million to build out and another half-million to put inventory in it. Eighteen months passed by and the dealership was still losing money. The owner told me a lot about uniqueness of the business, and that nobody else in California can do the restoration work they do. Apparently there wasn’t high demand for such unique work, especially in today’s economy. Instead of generating income for its owner, this business became liability.    

We presented the owner with business valuation that included cost of inventory and modest goodwill that will be recognized by strategic buyers. Owner found another broker who promised to sell the business for $2 million – twice as much as the owner invested in it. Despite the fact that we tried to explain the impossibility of any buyer paying so much for a business that’s losing money, and would be cheaper to start from scratch, the owner decided to go with the latter broker. Unreasonable expectations superseded common sense. Although purchasing decision is influenced by multitude of factors, net income is definitely the most important one in today’s market. Buyers base their purchasing decision and offered price on it.