Evaluating the Value of Your Business

ValueMy career now has me more focused on associations than individual businesses so when someone who wants to sell their business asks me how to set their asking price, or maybe whether an offer should be accepted, I defer to appraisers and brokers and to other industry consultants. Still, for the duration of that call, I listen so I can maybe offer various perspectives for them to consider. After all,it’s likely there are countless ways one can assess value, and an equal number of reasons one considers selling. Here are some less obvious considerations one might consider while weighing options:

How long has the business been on the market, and how many leads has the listing generated?  Some locations are harder to sell than others. Are they willing to wait a long time for the right offer? Maybe years? I know of some businesses that have been for sale for more than 10 years!

Are they sick and tired of owning the business? If one is literally sick or disabled, or maybe has lost a spouse, or maybe the business has paved the way toward divorce or has kept them far from their aging parents, or has any other significant personal issues, perhaps they shouldn’t let a low offer keep them from a healthier lifestyle.

How many years has the business supported them? In other words, how much have they already reaped? For example, I had my campground for 10 years, so for 10 years it sheltered me, fed me, insured me, provided my TV and phone service, and so on. Is that angle worth something to them?

How close are they to the end or start of a busy season? Do they want to sell at that time of year (and relocate, if they also live there)? Is the timing perfect? Or terrible?

What is their continued earning potential? Sometimes sellers are no longer able to work, while others prefer to work forever. I sold when I was too young to call it quits, and I’ve always known I’d like to work forever. It didn’t take me long to recoup the difference between my asking price and sales price … and I didn’t have to continue working so hard and paying enormous campground bills while I earned that difference!

What can be adjusted? Do they have retail inventory that can be liquidated through other means to help a buyer get the price down into their range? How about liquidating other assets? An experienced broker can help find ways to adjust.

This list is merely a sampling of things I sometimes ponder as I listen to these calls from campground owners.

Another Twist to the “Value”:

My business wasn’t listed when a buyer came along. Actually, I had listed it several years earlier, due to my poor health, but I took down the listing after more than a year without any sales activity. I had regained my stamina and chose to carry on for many more years. As it turned out, having no buyer was the best thing that could have happened!

  • First year while it was on the market:
    • Occupancy hit an all time low (fuel prices skyrocketed that summer), but that year I also experienced the least expenses in all of my years of ownership. I actually netted more than any other year!
    • I had all new employees.
    • I had more fun and enjoyment owning and managing the business. I couldn’t believe how carefree I felt and how much true pleasure life was giving to me.
  • The next year:
    • I had higher occupancy than previous years, still had control over the expenses, and netted even more than the previous year.
    • Switched up the summer employee program again, actually hiring one gal in the spring (even though I hadn’t yet placed an ad when she came to me). She was a complete God-send. She truly never worked for me; she worked for God, and because of her my office stress load was replaced with joyful productivity. Life was truly incredible!
  • The third year:
    • Still higher occupancy.
    • Still more joy, every single day.
    • Financially netted even more than the previous year.
  • The fourth year, which ended up being my last year as owner (even though I didn’t have it listed):
    • The trends continued!

Now, had I sold when my health dictated it, I would have missed out on the four most enjoyable and profitable years of my ownership!

FYI:  During the last years leading up to a sale, consider every dollar you spend. Some expenses can lower the appraised value. Now, that’s not true if an expense then generates a high return, but the return should be realized or earned before that expense can create a positive impact on the appraised value. Study your revenue wisely in those final years of your ownership.

Two Sides To The Value:  Buyers and sellers are sometimes oceans apart. Before buying our park we spent two years evaluating about 100 campgrounds that were for sale, ranging in price from 100,000 to $1,500,000 (in long ago dollars!). During that process we said we wanted to remember what it was like to be buyers when we’re sitting on the other side of the deal … and that is exactly what happened.

When is the best time to sell? 

  • While you are still able to keep up with the workload;
  • When the place is in its best condition;
  • When you’ve had a good run on your income and expenses;
  • While your health and relationships are all in fine order (or at least are still repairable);
  • When an interested buyer makes an offer that’s at lost close to acceptable (but remember that “acceptable” doesn’t always just match the financial spreadsheet);
  • Then maybe when you’re still young enough to enjoy another profession, maybe;
  • And then perhaps when the timing is right, maybe (people can move any month or season and children can adapt to new schools);
  • And always, if at all possible, while the partners are still enjoying their careers.

P.S.  My story is shown from the today’s vantage point. When I was sick, all I wanted was an immediate buyer! It didn’t happen, yet that is when my faith grew exponentially. That’s a “value” no buyer can provide!

I’m still alive to tell my story but please don’t take my story as your medical advice! Every step of the way, I had my doctor, corporate attorney, CPA, and faith focused on my personal situation. It worked for me but you’ll need to find out what works for you. I wish you great success in the sale of your business, and in whatever lies ahead for you.

Thank you for sharing your time with me! Please feel free to leave comments, or share or ‘like’ this with your connections.

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1 thought on “Evaluating the Value of Your Business

  1. Rob Smith of Fortune Real Estate sent this to me in an email in May and I want to post it here on his behalf (after having attained his permission):

    Fortune Real Estate has been following your blog since before we hired your services for our four businesses some years ago. We also still link to your blog since the content is valuable to those who visit our website.

    As for your blog dated May 3rd, 2018, I’m chiming in to add a few pointers from the broker’s vantage point.

    First, your readers should rest assured that if they’re the sellers, their health is confidential between the listing agent and the seller. Certainly, the seller needs to consider many things when studying an offer, including their health, but the prospective buyer won’t know that there’s a higher urgency in striking a deal.

    Another item you mentioned is that some expenses can have a negative impact on the appraised value. True! But it’s not a solid rule (this will vary in different states). For example, here in Florida many one-time expenses that are invested in recent years are classified as capital investments and they don’t have a negative impact on the appraised value. Examples:

    1) If a business chooses to invest $15,000 in ads, then that’s a basic expense. The seller should consider whether those ads would potentially increase additional revenue by $15,000 or more in time for the appraisal to be performed. If yes, then the additional revenue would be positive for the appraised value. Regardless, the ad expense is merely a business expense. Operating expenses themselves, while accepted and expected, tend to have a negative impact on the appraisal.

    2) If they choose to invest $15,000 into road improvements or a cabin, then the appraised value would actually have a positive impact.
    That’s not to suggest that a seller cease the marketing expenses! Buyers want to know that marketing is in place to gain future customers. For the most part, buyers appreciate the perceived value in turn-key operations.

    Too, if the seller doesn’t have a sale for a few years then those ads are for the benefit of their own business. Perhaps the seller will just do what’s working and not get too risky investing too heavily in new marketing opportunities.

    Mary, it’s always a pleasure to visit with you and to read your blogs. Please let me know when you’re back in Florida.

    (Per email from Rob@FortuneRealEstate.com)

    (I apologize for the delayed posting of this comment.)

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