The 8 Dumbest Ways to Try to Sell Your Company

We know, we know -- outsiders never understand the true value of your business, do they? Which is why you price it at 15 times earnings and end up owning it for life

Honestly, you'd think the word would have gotten around by now. You'd think that company owners trying to sell their business would have heard from potential buyers, from their brokers -- from this magazine -- that when you overprice the darn thing, it's going to have your name on it for a long time.

We thought the same thing back in August 1992, when we did a retrospective on the companies that had been featured on our "Business for Sale" page. Our story, titled "Why You Won't Sell Your Business" ( [Article link]), revealed that of the 15 businesses we'd put on the back page up to that point, only 2 had been sold.

At first we figured we'd done a pitiful job of picking attractive businesses to write about. (Hey, we're not perfect.) Or perhaps the market that year was in the tank. (It was.) Or maybe the pricing was off. Way, way off. (Bull's-eye.) Asking the experts to help us pick through the wreckage, we heard time and time again that sellers were overestimating the value of their charming country inns, colorful fishing piers, and gutsy small-town newspapers.

Cut to 1994. This time around, we've got 28 businesses to sift through, and, hey! -- our hit rate is up! Ten of them have sold. Are we picking them right these days? (Who said we're not perfect?) Is the U.S. market in better shape? (It is.) Or can it be that owners are finally putting sensible sticker prices on the businesses they're selling? (Read on.)

But first, a confession: As much as we'd like to, we cannot pretend that our batch of highly selective (if not downright funky) businesses is representative of the U.S. market as a whole. "You happened to select more businesses that were fairly priced," one expert told us. However, our list does give us an opportunity to examine some broader trends and to show how some sellers go about off-loading their businesses all wrong.

Sellers' pricing gaffes notwithstanding, there is more activity in the low-capitalization end of the market, according to most brokers. Actually, says Duncan Haile, managing director of C.D. Peterson Associates, a brokerage firm in Danbury, Conn., "there's more money chasing deals than there are good deals to be had." The difference today: only the good deals are getting done.

Put it down in part to the demise of the cute-country-store lifestyle play that marked the end of the Greed Decade. "Those investment bankers who made their money in the mid-1980s and then decided to quit the rat race by buying a quaint business in a small community -- typically for all or mostly cash -- are no longer around," says Susan Pravda, a managing partner at Epstein, Becker & Green, in Boston. That's not to say that noneconomic factors -- the picture-postcard location, the dreamy hobbyist business -- aren't, well, factors anymore, just that they're less influential than they were, say, four or five years ago.

Link it, too, to the collapse of inflated valuations spurred on by the merger fever of the '80s; more business owners are tackling the process of selling with a tad (we said a tad) more realism. "Gone are the days of overpaying," says Darrell Fouts, president of Colorado Business Consultants, in Denver. He says earnings multiples (against which sale prices are often measured) have dropped. A handy example of a modern multiple that makes much more sense: the one used by the North Carolina motorcycle dealership, which sold for 2.7 times earnings -- near dead center compared with national averages compiled by Bizcomps. (See table, page 3.) One observer went as far as to say, "If I could find them, I could sell 100 businesses like this a year."

Plus, the banks are starting to lend again. The relative vigor of the U.S. economy puts buyers in a more expansive mood. And there's a little more willingness on the part of buyers to think about terms other than all cash, such as sellers' notes, earn-out agreements, and purchase of controlling interest. That's certainly what helped clinch a deal for the owner of the Nevada casino, who still holds 20% of the business, and for the proprietor of the New England rowing-equipment manufacturer, whose sale terms included an earn-out -- and a nice flexible arrangement in which the new owner rents living space to the seller. We're guessing that the Virginia French bakery might have been sold if the seller had been able to finance the deal. As it was, at least one buyer was interested -- despite the need to get up before daybreak to fire up those ovens -- but couldn't get financing. (Then again, maybe financing would have been easier to get if the price had been lower. But we digress. . . . )

But let's not go overboard about how smart the sellers have suddenly become. Even our limited sampling shows that they're still just not realistic enough when it comes to pricing. Of the 28 businesses we profiled, 9 are still on the market, and half of those haven't seen a price drop -- or a big-enough price drop, at least. Of those businesses whose asking price exceeded 3.5 times the earnings base, 22.2% were sold, compared with 35.7% overall. (Of those businesses with asking prices higher than 100% of annual sales, 25% were sold, but they all involved real estate.) According to David Bishop, president of American Business Appraisers, a business-valuation firm in Lake Oswego, Oreg., "Even the sexy lifestyle businesses don't sell when you get up to 4 times earnings, unless there's real estate. With the more mundane businesses, when you start getting much beyond 3 times earnings or 50% of annual revenues, they simply don't move."

Of course, price is not the only factor that sellers screw up, as you'll see from the table on the next few pages. But it's definitely the cardinal sin. According to Ian MacLachlan, president of the Business Team, in San Jose, Calif., "The real problem is with the seller who won't listen to reason when pricing the business." Warped valuation methods abound: You can perhaps convince us of the arcane merits of the "discounted future-earnings method." But when we hear about maneuvers like "six times your zip code" -- a great method if you happen to live in California -- we really have to wonder what that seller's been smoking.

It gets weirder. While attending a business-valuation seminar not long ago, I was asked why I was there. I said that since I wrote a monthly column on the subject, it was important for me to get a sense of what went into putting a price tag on a business. The guy laughed, took out a laminated card, and said, "Here's all you need to know." On the card was this formula: