It's All About the Earnings

I've had the same conversation with several business owners recently who want to sell their business.  They talk about how exciting the industry is, how much potential there is to grow, how they plan to market the company going forward and how much another person/people would enjoy owning this business.  After all the hype, I asked them the same question:  What have the business' earnings been in the past three years?  Silence.  Squirm.  *Ahem*.  Well...not so good, they say.

"Not so good" usually translates into a breakeven or loss situation.    Many times a business owner will take so much out of a business that there is nothing left - all the value has been transferred from the business to the owner over time and there is simply nothing left to sell.  Other times, the business has passed the mature stage of the business life cycle and is in a state of decline.  The business owner either wasn't aware things were headed in the wrong direction or they chose to ignore it. 

The reality is that a company's value is based on its earnings, not its window dressings.  Sure, the attractiveness of the industry has something to do with it; a great staff and brand new equipment certainly helps - but earnings are the primary driver and without them, a business usually can't be sold for much. 

Profits (aka earnings or "the bottom line") can be increased two ways:  Bring in more revenue or reduce expenses.  That's it.  There is no other magic formula and buyers typically won't invest in a dream or a vision that hasn't yet worked for you.  If you won't invest in your dream or vision, they certainly won't.      

So what are some options for a business in a breakeven or loss situation?  Sometimes the answer is close the doors and liquidate the assets.  Other times, they can find an employee or someone else who has a reason to buy such a business and seller-finance a meager purchase price over time.  Occasionally, they will hit the jackpot and a competitor will pay a premium just to get them to exit the playing field.  Often, the BEST option (if the owner can afford the time and financial investment), is to make the business a going concern.  Turn it into something that people want to buy.  Put yourself in the position of a consultant - what would you advise the owner of your business to do to make it more profitable?  You may need to consult with your accountant, attorney or business advisor to make sure it's a good idea.  Then do it.  THEN - after three years or so of strong earnings - sell it. 

Selling a business should be a carefully planned event.  The owners who get the highest selling price are often implementing an exit strategy they planned years earlier.  When you have the foresight and the strategy in place, you will be rewarded for your efforts.