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.

* * *

Hawaiian flower farm
Issue: May 1991

Price: $1.2 million; inquiries: 30

Status: Still for sale

Inquiries have come mostly from mainlanders who say they'll have a look when they're on the island. Nothing sounds serious yet.

* * *

Idaho up-country ranch
Issue: June 1991

Price: $2.5 million; inquiries: 10

Status: Still for sale

The most avid inquiry so far came from a woman looking for a site for an Arabian-horse-breeding farm. She visited the ranch but thought it a little too rugged. She has an aversion to heights, says the owner, and found some of the trails too steep and narrow. But she did fall in love with the property; had it been a little flatter, she'd have bought it. Inquiries keep coming in, nine months after publication.

* * *

Small-town weekly
Issue: July 1991

Price: $950,000; inquiries: 30

Status: Pulled off market

The broker has received calls from several types of parties: other brokers (which doesn't thrill him); a few individuals who wanted to purchase the paper and return it to the employees through an employee stock ownership plan (the owner isn't interested in that); and a few legitimate candidates. The problem, according to the broker, is that the seller is sticking to his price -- which is too high, given the current sour newspaper climate. The poor economy puts the paper in a catch-22: potential buyers want to pay rock-bottom prices (and cite credit tightening and falling ads as justification), while the seller, remembering the newspaper boom days of yore, thinks his paper will fetch more. Newspapers aren't the only businesses that aren't moving: this broker currently has an all-time career high of listings on the market.

Seattle bookstore
Issue: August 1991

Price: $62,000; inquiries: 30

Status: Still for sale

Inc.'s page generated several visits to the store by prospective buyers. Not one response, though, came from someone with bookstore experience -- inquiries were all made by entrepreneurs and managers who tended to get scared when they saw what this business is really all about. "That's what's dangerous about a dream business," says owner John Marshall. "The emphasis is always on the dream." The word is out in the trade, and Marshall thinks that's the way his store will ultimately sell. He'll hang in there until that happens. A father-son duo are strongly interested; they originally called and said they'd take it in three days, then disappeared for a few months (doing industry research, presumably). They now say they're still considering it. Wealthy father would be buying it for his son; son has "the right instincts," but virtually no experience. "At this point it would be difficult for someone with no experience to step in and expect to improve the business," Marshall says.

* * *

Family-run child-care center
Issue: September 1991

Price: $940,000; inquiries: 0

Status: Still for sale

Not one inquiry! That may be attributable in part to the fact that the owners listed a post-office box in lieu of a phone number for contact. They even sent letters to themselves to make sure their box was in working order. Alas, it was.

* * *

Maine model-ship maker
Issue: October 1991

Price: $365,000; inquiries: More than 200

Status: Sold

"To say the response [to Inc.'s page] has been overwhelming is an understatement," wrote broker Don Giancola last December. "We received our earliest responses from the Chicago area. Maybe there are a lot of landlocked sailors in the Midwest. You might also be interested in the diversity of the people who responded. In addition to the typical potential buyer, we received serious inquiries from presidents of two publicly traded companies and from William Seidman, former head of the FDIC. We now have multiple offers to purchase the company. A very highly qualified buyer (and Inc. reader) will be closing on the transaction December 31, 1991." The sale did close (for slightly less than the asking price), with the company going to a woman who aims to bring more sophisticated marketing to the business by capitalizing on her background as a strategic planner. Her husband, head of human resources worldwide for Motorola, wants to take early retirement and was anxious to move to the Maine coast.

* * *

Arizona AM radio station
Issue: November 1991

Price: $650,000; inquiries: 100

Status: Still for sale

Responses came from all over the country, says the broker, as well as from Nova Scotia. He's optimistic that one of the inquiries will turn into an offer. A reli-gious-radio-station group, based in Santa Ana, Calif., with stations nationwide, was very interested but wasn't satisfied with the signal at night. Two lawyers, one from Chicago, one from New York City, are seriously considering purchase.

* * *

New Hampshire country store
Issue: December 1991

Price: $325,000; inquiries: 30

Status: Sold

"Readers all over the country have called to inquire about the store," wrote broker Gerry Sears shortly after the article appeared. "There are a considerable number of dreamers out there, and the talks with the people who have called have been very productive. To date, I have sent out 22 initial packets and have received several secondary responses." By this past February, Sears had a buyer.

* * *

Minor-league baseball franchise
Issue: January 1992

Price: $2.5 million to $3 million; inquiries: 60

Status: Sale pending

Early response was vigorous. Also, several other deals by this broker (sales of other teams) have been initiated, thanks to the article.

* * *


An open letter to businessowners -- and would-be sellers -- everywhere

Editor's note: Among the most articulate commentators on Business for Sale results was Susan Pravda, a mergers-and-acquisitions specialist with the Boston law firm of Varet Marcus & Fink. Here's what she wrote when we asked, Why haven't more of these companies been sold?

1. Bad timing. The market window this update deals with -- from late 1990 through early 1992 -- was probably the worst period in the past two decades for buying and selling small businesses. After the overheated mergers-and-acquisitions climate of the late 1980s, the market came to a jolting halt.

On the sellers' side, owners were still living in the high-priced days of the '80s, thinking that if their country-club friends were able to get eight times earnings for their companies, why couldn't they? On the buyers' side, prospective purchasers were paralyzed by a combination of fear about the economy and the unavailability of financing. (Many banks stopped lending to finance the working capital of existing businesses and were certainly not interested in financing acquisitions.) Prospective buyers also were spooked by the number of failing deals and bankruptcies.

2. Unrealistic prices. It is a classic problem in the sale of small to midsize companies that sellers are unrealistic and inflexible about the price of their businesses. To them, the business is a precious thing, bound up with their ego.

But even if a business is looked at from a nonemotional perspective, an owner can justify a higher valuation of the business than the prospective buyer can. From an economic point of view, the value of a business is based on its cash flow, discounted to take into account the risk that the cash flow will not remain stable or continue its upward trend. That risk is attributable to a variety of factors: the economy (Rocky Mountain outdoor-goods discounter); the change in customers (small-town weekly); even the weather (Florida fishing pier). For the current owner, those risks do not appear to be so great: he or she has a history of business performance, and even past troubles seem diminished in significance. For the new buyer, the unknown and the uncertain, coupled with imperfect knowledge about the business, result in a greater perception of risk -- and hence a larger discount.

3. False intentions (the owner's). Another small-business classic: the owner who does not really want to sell.

Maybe that owner just put the business up for sale to test the market, so he or she could sleep better at night knowing that the business is worth a half million dollars. Maybe family members or a spouse put him or her up to it, and when the business does not sell for the asking price, the owner can go back and say, "See, I tried, but there is no one willing to buy." Maybe the owner realized he or she could make more money by keeping the business than by selling it. For example, the San Francisco restaurant/pub is generating about $200,000 in cash flow a year and, according to the insider's formula, is worth $650,000. The seller can earn that price back in three years, and everything after that is gravy.

Moreover, since most buyers pay only a portion of the purchase price in cash, the seller may get less cash by selling than by keeping the company. That is especially true because the deferred purchase price is typically dependent on the success of the business in the hands of the buyer, and the seller may feel more confident of keeping the business profitable as long as he or she is the boss.

Thus, the first question every buyer should ask: why is the owner selling the business?

4. The fickleness of fashion. For most midsize to large businesses, valuation is based on financing fundamentals: How much cash does the business generate? How steady and reliable is that cash flow? And what is the upside potential for increasing market share, revenues, and profits? For small businesses, emotional and other noneconomic factors often come into play.

Those make valuation quite uncertain and much more dependent on the fashions of the times. There are always the trophy businesses, such as the minor-league baseball franchise and the Napa Valley winery. But generally, emotion, fashion, and personality make a mess of the valuation process. And that can scotch deals. What's important to understand is that fashion is subjective, and no two buyers and sellers are likely to judge it -- or the price attached to it -- the same way.

5. Personal problems. The need for fulfilling personal objectives, such as finding a romantic retirement business in rural New England, continues to motivate transactions in the small to midsize business marketplace.

Like the trophy businesses, such enterprises are not priced on a financial basis. (See, for example, the New Hampshire country store.) However, they do provide the prospective owner with a perceived lifestyle different from the frenzy of a job in the city and typically also include free room and board, as well as status in the community, as part of the benefits. (See the Vermont country inn, for example.) Since no bank or other financing source will accept such noneconomic justifications, those businesses must generally be bought for cash. Even seller financing does not work if there is not enough cash flow to pay the interest and principal on the debt. In the 1980s partial financing was available from local banks that lent on the basis of real-estate values, but that source of financing is no longer available. Thus, noneconomic deals don't sell unless they are trophy businesses available to the truly rich (that is, cash-rich) buyer.

6. Too few had double appeal. The Maine model-ship maker that sold had a combination of strong financial appeal and, for the eventual buyer, personal-satisfaction appeal. And that combination came at a relatively low price -- especially when compared with the Vermont inn, in which case low cash flow had to support a high (and real-estate-driven) purchase price. For the model maker -- as for many businesses of this size -- the combination worked.

7. Technicalities. Even for small to midsize businesses, the need for proper structuring -- using qualified legal and accounting help -- is critical. The owner of the Rocky Mountain outdoor-goods discounter got the price he was asking for but was unable to sell because he failed to create a legal structure for the business that was acceptable to the buyers. Proper planning, either when the business is organized or at least a few years before the sale, could have significantly increased the value to the owner.

8. Confidentiality (an aside). The need for confidentiality is an often-voiced concern of sellers. While a confidentiality agreement signed by every prospective buyer provides legal protection, sellers must expect that their decision to put the business on the auction block will eventually leak out. Accordingly, they must prepare for a leak and take all necessary steps in advance to minimize its impact. If the stage is properly set, news of the impending sale of a business need not destroy employee, vendor, or customer relations. Sometimes the only person who is upset about the leak is the owner, because he or she really was not ready to sell.

9. Maturity doesn't sell. Few of the businesses for sale had substantial growth potential. Most were mature businesses in a limited marketplace. Accordingly, they were priced relatively low and were of limited interest to entrepreneurial buyers who were looking to acquire a business so they could launch it on a new phase of growth.

-- Susan Pravda