Why You Won't Sell Your Business
Inc. revisits companies listed in the Business for Sale column.
Would-be sellers have some lessons to learn, say experts who've studied the track record of Inc.'s Business for Sale column. Here's what has happened to all those companies on the block. And why.
Behind every business for sale there is a story. Behind a whole lot of businesses for sale there are a whole lot of stories. And there are also -- it turns out -- some lessons.
In November 1990 Inc. began publishing the American Dream: Business for Sale as a regular page in the back of the magazine. Through January 1992, 15 businesses had been presented (those that have appeared in more recent issues need more time before they can be updated), complete with descriptions, financials, and asking price.
What happened to them? By this past June, five had been taken off the market; seven remained more or less (in some cases a lot less) available; one was nearing an expected sale; and two -- that's right, only two -- had been sold.
Why the lousy hit rate, you wonder? So did we. To make sense of it, we contacted business brokers, mergers-and-acquisitions deal makers, lawyers in the business-selling arena, and of course, the business owners themselves. We then asked them to make sense of it.
Students of the page -- and of business-sale transactions -- weren't surprised. Buyers and sellers get cold feet, they said; "done" deals get undone every day. Things take time. Things take luck. (Firing away at Inc.'s million-plus readers, it was pointed out, can't be equated with a focused search for the right buyer.) And, most of all, things don't happen for an unrealistic price.
On that count, we at Inc. caught some heat. "[You've showcased] a sequence of ludicrous prices and situations that defy logic," wrote a broker in New York City who asked not to be named. "No business should be presented that does not offer a reasonable income after financing. I use a figure of $40,000 to keep dogs off my books. You should stick with a rational pricing policy. You won't find many buyers who will spend 10 times earnings on a small business. If you do, send them to me!"
At least 6 of the 15 businesses, says Denver broker Darrell Fouts, president of the International Business Brokers Association, "are actually real-estate plays with a possible lifestyle benefit. But lifestyle buyers, by necessity, usually must also be financial buyers. Most financial buyers need a 20% return on investment to meet acquisition-financing needs and to meet their risk-reward needs."
Every expert we reached scolded the brokers representing the businesses we profiled. Brokers should educate sellers about the fairness of their prices, said the critics. But, as we learned while talking to dozens of brokers each month, rare was the would-be business seller who cared to be educated. "I know the price is high," we can still hear broker after broker lament when confronted with evidence of industry pricing norms and operating conditions. "I keep explaining that to the owner. But he says this is what his company is worth."
Everything considered, Fouts reminds us, "the results of these 15 companies are fairly typical. Sellers who seek high prices from unwary buyers are finding the effort futile. Buyers are becoming more sophisticated and realize that most deals are financially driven even if they are unusually attractive because of lifestyle." (See "Same Old Story," below, for more analysis of the Business for Sale results.)
So if the hit rate has been poor, continues Fouts, look first at the most obvious of factors. "True, the general selling market has been slow and difficult, with bank financing for acquisitions almost nonexistent -- but, because of pricing, most of these companies didn't have a chance from the start."
Here, business by business, is what's happened to Inc.'s Businesses for Sale.
* * * San Francisco restaurant/pub
Issue: November 1990
Price: $750,000; inquiries: Several
Status: Pulled off market
Among the several serious inquiries, one was from a supplier. Apparently, that supplier betrayed the seller's confidentiality, and the owner decided not to sell after all.
* * * Rocky Mountain outdoor-goods discounter
Issue: December 1990
Price: $3 million; inquiries: Several
Status: Pulled off market
Article generated offers in the $2.7-million-to-$2.8-million range, but store went off the market owing to complications -- the stock needed to be purchased, and buyers weren't interested.
* * * Vermont country inn
Issue: January 1991
Price: $2.15 million; inquiries: Four
Status: Pulled off market
The inn was removed from the market by the sellers the very day the broker received two firm offers. The broker blames the shortage of inquiries on the high quality (and therefore high price) of the business and the overall decline in the country-inn market.
* * * Florida fishing pier
Issue: February 1991
Price: $590,000; inquiries: 55
Status: Pulled off market
Early negotiations with interested parties met with a snag: the pier lacked insurance, and it proved difficult to find a carrier who'd cover it. Lloyd's of London saved the day (and upped the asking price a bit). Offers of $450,000 from a respectable Canadian and $500,000 from another party (Sea Hawk, the only publicly owned company that hunts for sunken treasure) were spurned by the owner, who wanted more. "We brought him excellent deals, but he wouldn't budge," says the broker, who advised his client that he was asking for more than the pier was worth. The owner responded by taking it off the market. But the story has a happy ending of sorts: the broker was able to put three prospective buyers into other businesses.
* * * Colorado white-water rafting company
Issue: March 1991
Price: $350,000; inquiries: More than 130
Status: Still for sale
This business drew a response second only to the interest in the Maine model-ship company; 25 or so parties flew to Aspen for a peek. Many prospective buyers, who were primarily young families with children, were nervous about raising their kids in the racy Aspen lifestyle. Two groups are waiting till the end of the current season (October) before making a decision.
* * * Napa Valley winery
Issue: April 1991
Price: $5.9 million; inquiries: 15
Status: Still for sale
A current hillside ordinance and a tightening of no-growth sentiment have made this a tough sell. There is legislation pending that will affect building and expansion. Among the inquiries was one from the Culinary Institute of America, which sought a West Coast site in epicurean Napa.
