The 8 Dumbest Ways to Try to Sell Your Company

(1/2 gross sales + (5 x earnings) + book value)/3 = price

"Does this work for all businesses?" I asked. Sure does, came the reply. But, how did he know? "It just does."

Would that it were that simple. As much as people would like One Universal Rule, it simply does not exist. Not that folks haven't tried to find one. Here are some fairly stunning examples of the, um, inventiveness of the U.S. businessperson when it comes to pricing a business.

"You know, I've always wanted to go to Madagascar."
Sellers often base their asking price on the amount of money they need for what they are planning to do next. Maybe they've figured out that they need $600,000 to retire. Or they need $100,000 in seed capital for their next venture. Or maybe they're just planning a trip around the world. According to business-valuation expert David Bishop, those rationales have nothing to do with the current earnings stream, which is really what the buyer is buying. "Say I want to buy a new car, and I need $50,000 to get a new Infinity Q45. Well, that's great, but that has nothing to do with the value of my 1978 Dodge Dart."

"I've put a lot of money into this business over the years. Now I want it back."
So the buyer should care? Says Susan Pravda: "Sellers often make the mistake of equating market value with cost. But there is only one test of value: the cash-generating ability of the business." Pravda's opinion: had the owners of businesses such as the Wyoming hot-springs water park and the Michigan airplane brokerage grasped that fully, those businesses might have been sold.

"I owe. I owe. So on the block I go."
Some sellers want to use the sale as an opportunity to get them out of the red, either commercially or personally. But the buyer would have every right to ask, "Why should I pay for your bad business decisions?"

"Because I want a million dollars, OK?!"
Bishop calls this the WIFL method: Whatever I Feel Like. Sometimes setting a price is pure caprice on the part of sellers. And no amount of smooth talking will persuade them otherwise.

"It would cost me half a million to start it from scratch."
This oft-spouted ploy is usually called "replacement value." And sometimes it is germane to value. However, if it would cost $500,000 to re-create an existing business, but the market price for that business is $200,000, then the "replacement value" needs to be replaced with a better valuation method.

"Earthquake? What earthquake?"
Subtitle this one "Well, we meant for there to be revenues." If the Southern short-line railroad didn't use diesels, we could add a lame line about how it ran out of steam. But it's hard to know what the railroad's purveyors were thinking, knowing that if their single, solitary customer uncoupled its business, revenues would be history. It did, and they were.

"OK, here's my price. Now I'll just add fixtures and equipment and . . . "
If you set a price based on an earnings stream, the buyer is buying not only that earnings stream but the means by which to achieve it. So tacking on an extra charge for fixtures and equipment is like selling someone a car and then charging for the key.

"Fred said he'd give me $500,000 for my business. Let's see, that was nineteen seventy . . . three?"
Sellers often fixate on an offer they may have gotten a long time ago in a totally different marketplace. National and local economic factors have more than likely changed considerably since then, but the owners get that magic number in their heads, and there's no dissuading them.

One last look over our list. Ah yes, the Florida travel agency. It was priced to sell, and it was pleasantly profitable. But it came with something that really warms up buyers: financial records -- lots and lots of them. (The seller was an accountant, you see.) Duncan Haile explains that you may need to spoon-feed the buyer. "You want to help the sale go forward, so you need to give the buyer what he or she will need to do the due diligence: equipment lists, customer lists, supplier information, and the like." Bottom line: make it easy for a buyer to understand the business completely -- where it's been and where it's headed.

And if you can combine the right price with financials that have been audited by a reputable firm -- with none of those discretionary expenses (you know, the country club, the tennis lessons) hanging on -- you'll be fighting off the bids from qualified, cash-rich buyers.

Trust us.

WHAT AM I REALLY BID?

These averages give a rough (very rough) sense of what businesses are selling for these days

Source: "Bizcomps '94, the Second Annual Study of Recent Small Business Sales," Asset Business Appraisal, San Diego.

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Rocky Mountain Water-Ski Shop