Jill Andresky Fraser is Inc.'s finance editor.
BUSINESSES FOR SALE
COMPANY: Southern car wash
DATE FEATURED: July 1997
ANNUAL SALES: $270,000
ASKING PRICE: $400,000
NUMBER OF INQUIRIES: 30+
RESULT: Sold in March '98 to a local car-wash owner for $360,000
COMPANY: New England stained-glass-window restorer
DATE FEATURED: August 1998
ANNUAL SALES: $201,000
ASKING PRICE: $155,000
NUMBER OF INQUIRIES: 25+
RESULT: Sold for within about 10% of the asking price in January '99 to a remodeling contractor
COMPANY: California nudist resort
DATE FEATURED: March 1998
ANNUAL SALES:$125,000
ASKING PRICE: $525,000
NUMBER OF INQUIRIES: 40+
RESULT: Sold to a loyal customer for $495,000 before Inc. article hit the newsstands
COMPANY: Northwest camping retreat
DATE FEATURED: August 1997
ANNUAL SALES:$214,000
ASKING PRICE: $550,000
NUMBER OF INQUIRIES: n.a.
RESULT: Sold in July '97 for close to the asking price, to buyers who found it on the Internet
COMPANY: Rodeo event-marketing company
DATE FEATURED: November 1998
ANNUAL SALES:$2.7 million
ASKING PRICE: $1 million
NUMBER OF INQUIRIES: 24
RESULT: Got plenty of initial interest, but no offers yet. Owner's strategy is to increase sales.
COMPANY: East Coast nursing home
DATE FEATURED: December 1998
ANNUAL SALES:$1.4 million
ASKING PRICE: $1.4 million
NUMBER OF INQUIRIES: 50+
RESULT: Got lots of interest from industry players but is still on the market
COMPANY: West Coast manufacturer of laminated boards
DATE FEATURED: February 1998
ANNUAL SALES:$2.7 million
ASKING PRICE: $3.4 million
NUMBER OF INQUIRIES: 20+
RESULT: Received several low offers, but owner decided to relocate and restructure
Business for sale: No sure thing
Conventional wisdom holds that only one-quarter to one-third of small companies on the market are ever sold. At first glance, it's hard to fathom why the rest--many of them healthy businesses--cannot find buyers, or if they do manage to sell, why they command such relatively low prices. The explanation lies in some powerful marketplace realities.
The biggest problem, perhaps, comes from the inefficiency and fragmentation of the small-business merger-and-acquisition market. Although the Internet may help change that, traditionally it's been difficult for would-be buyers and sellers to find each other, unless they happen to hook up with the same regional business-brokerage firm or patronize the same classified-advertising venue. Another problem is that small private companies often thrive in lucrative but tiny market niches, exactly the kind that are easy for potential buyers to overlook.
Finally, one key business formula that measures cash flow often works against the small-business seller (unless he or she is selling a lifestyle business, in which other factors can help outweigh financial matters for potential buyers). Although most buyers look for a company with good growth prospects, they will price deals based upon prior financial performance and pay special attention to the previous year's cash flow.
A buyer is usually looking for a company whose cash flow can cover its current operating expenses plus three other numbers: 1) the salary that the new owner hopes to earn or plans to pay an on-site manager, 2) projected annual financing costs to cover the amount he or she must borrow to make the purchase, and 3) an annual investment return on whatever cash the new owner puts into the deal. Savvy buyers probably realize they could earn at least 10% a year just by putting their savings in a mutual-fund portfolio. Most hope to better that performance, with an investment return that covers the additional risk associated with buying a business.
That formula sets a high standard for any company's cash flow. After all, the current business owner may be drawing a below-market salary or may not need to pay any financing costs at all after starting the company from scratch. The notion of investment return has probably never entered into his or her thinking, at least not until it comes time to price the company for sale.
And there's the rub: If the company's cash flow can't meet the standard described above, its selling price will have to drop until it reaches a point at which lower projected financing costs help close the deal. And in some cases--especially for those companies in obscure niches or industries without any consolidation activity to help spark a bidding war--the numbers won't ever pan out to support a sale.
