If you’re trying to sell your business and have had no reasonable offers, you could be in for a rude awakening without the right exit plan.
The stats don’t lie. Most businesses never sell. They close their doors not because the business doesn’t make money, but because there aren’t any buyers.
They close because…
- A business broker told them they could list their business for sale and expect an outlandish price for the company in its current state.
- Every buyer who looks to acquire their company needs a loan.
- They are unwilling to mitigate the risk of failure to the buyer.
As I’ve said in previous posts, 99% of business acquisitions include some form of financing, with a large majority of them needing conventional lending. The problem is that the lender determines the valuation. Lenders will look at your past 3 years of tax returns to determine how much you take home. Then, they calculate how much they think the business can take home without you. To simplify, the profit they believe that your company can make without you is the number they’ll use to calculate the value of your business.
Based on how your business runs without you, lenders will lend between 1 and 3 times your company’s EBITDA (earnings before interest, taxes, depreciation, and amortization).
EBITDA is calculated by adding back interest, taxes, depreciation, and amortization expenses to net income.
Formula:
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization.
But EBITDA can be deceiving. If the business has a lot of debt, it might not have enough cash flow to pay all the bills and repay the loan.
If you’re going to sell your company and your buyer needs a loan, the repayment of the loan will come from the business’s cash flow. Lenders look for a DSCR (debt service coverage ratio) of about 1.5-1.8x. With SBA, the multiple can be as low as 1.25 if the business checks all of the other boxes. What that means is that if the loan payments are $100K per year, most underwriters want to see at least $150K in excess cash flow.
I won’t buy a business that doesn’t have a 2x DSCR.
But lenders don’t just lend on profit alone; what they bank on is the transfer of value from you to the buyer.
The transfer of value is highest when you can vacation for months at a time and come back, and your business makes more money while you are gone.
When you can do this, a buyer can step in without much outside influence, and the business will have the strength to be successful.
And here’s where the problems come in for so many sellers. If it seems like no one wants to buy your company, let’s look at the most common reasons you’re not getting offers.
You may have a great lifestyle, but if you need the sale of the business to provide some or all of your income in retirement, you’ll have to make your business attractive to buyers.
A lifestyle business looks great to you but not to buyers. There’s way too much risk for the buyer.
And here’s the thing: You may not believe that you have a lifestyle business, but in your heart, you know it will be challenging for anyone to take your place. That’s the risk. Most buyers aren’t going to pour their blood, sweat, and tears into something unless there’s a high probability of success.
To sell a lifestyle business, you must understand how an outsider will evaluate your company and establish a valuation to buy you out.
When you’re not getting offers, your business:
- Expenses a lot of items that fuel your lifestyle, so your company doesn’t look profitable enough to potential buyers – profits attract buyers (and lenders).
- Is YOU. You are the business, and it doesn’t run well without you. It’s risky for the buyer because they aren’t you. Buyers want assurance that you can transfer the value of the business to them.
- Broker/Friend/Advisor is giving you an inflated sense of what your company is worth. They see your lifestyle but don’t consider how hard it will be to replace you, so they inflate the value. This is a common tactic business brokers use to get listings that expire without a sale.
Look, it’s not your fault. This scenario is extremely common for businesses with a net profit under 2 million.
Let me explain.
I’ve always been an entrepreneur.
From the time I was old enough to cut lawns and shovel driveways, I made money. I bought my first riding lawnmower when I was 9. It didn’t run, but I got it running, and it made me a lot of money after school and on weekends.
When I was 14, I got a paper route. I delivered newspapers at 4:30 AM every day in Brookfield, Wisconsin. You have to understand that some Wisconsin mornings are so cold that I can’t quite describe it to you; it’s insane. I delivered the Milwaukee Sentinel every day for two years, 7 days a week, sick or not. I got the job because I answered an ad in a newspaper for a paper route in my subdivision. As a paper boy, I was required to put the paper inside the storm door during extreme cold or snow or on the front doorstep for the rest of the days.
Here’s the back story: At 14, I needed to find something “legal” to do to make money. My friend Paul and I just got suspended for selling candy in junior high. We were making so much money that we were hurting the candy sales in the school cafeteria, so they suspended both of us.
Here’s the kicker…
I got used to having money, so I needed to find a hundred bucks a week quickly. You have to understand that this was the 1980s; a candy bar cost a quarter, and a 10-pack of Now and Later cost a quarter. I figured out I could sell one Now and Later for 10 cents each. Gum was no different. So, when the minimum wage was 1.85/HR, Paul and I made a 750% profit on candy and made most of our money in 5-minute sessions between classes. Let’s just say Paul and I were late to class a lot. This is likely the reason I may or may not have allegedly participated in selling pot in high school. 750% margins are tough to argue. It’s hard to get the margins working a job.
Sorry, back to newspapers.
When my route started, I had 73 customers who paid 35 cents per day and $1.25 on Sunday. I made a profit of 10 cents per day and 25 cents on Sunday on every paper I delivered. It took about 1.5 hours every morning, but I was making around $5.91 per hour when I took over the route, and the minimum wage at the time was $1.85 an hour. I wasn’t getting rich, but it was easy money. All I had to do was get my ass out of bed.
But when I realized all I had to do to make more money was get more subscribers on my route, I decided to make intentional mistakes. I didn’t know what marketing was; I was 14. But I understood human nature, so every single day, I paid for 5 extra papers and placed them in random front doors on my route, which taught me reciprocity.
People would call and tell the route manager that I “accidentally” left the Sunday paper on their doorstep, and then he would sell them a subscription. He made money, and I made money.
Even though it sucks getting up at 4:00 AM and freezing your ass off to make a buck, I was “self-employed” and made more per hour than almost anyone I knew, and I learned how to make my income grow; I just had to get more customers and work a little harder.
The truth is, at 14, I owned a lifestyle business—heck, I’ve owned lots of them over the past 40 years.
So don’t feel bad if you own one.
Most businesses start as nothing more than a job, then become a high-paying job for the owner. Over time, you hire more employees, and roles change, but you remain a high-paid employee of your company.
Lifestyle businesses are nearly impossible to sell if you don’t address the problems that prevent your buyer from getting financing.
The way I see it, you have two choices when selling a lifestyle business.
- Be the bank and eliminate the financing obstacle your buyers face. You can close quicker, pay less taxes, and ensure your buyer has an extremely high probability of success. You hold the cards.
- Or, if you have a year or two, work with someone who can guide you through converting a lifestyle business into something that checks every box for buyers and lenders. When you do, you’ll sell for top dollar.
If you have a lifestyle business and you’re ready to transform the areas of your business that prevent buyers from getting financing, we can help.
But don’t wait because here’s what usually happens.
Most wait too long.
Many owners know they are going to sell in the next year or two, and they know they have to make tough changes if they are going to get enough to retire comfortably. But they get busy, and a week becomes a month, and a month becomes a year, and before you know it, you’re staring retirement in the face of a business with a very low probability of finding a suitable buyer.
And some do nothing at all. They wait it out and close the doors, eliminating their employees’ jobs and forcing lifelong customers to take their business elsewhere.
These same owners say, “All I really care about is knowing that my employees will be okay. After all, these are my friends; I’m closer to them than my own family.”
Look, if you waited too long, you don’t have to close your doors. You just need to assist the right buyer in transitioning your business to them. I buy lifestyle businesses and might be the right buyer for your company.
Let’s talk. You can schedule a confidential call with me here.
If you have some time before you have to sell, I can help you determine what your business is worth today. If the valuation doesn’t meet your retirement wants, I’ll give you a blueprint so you’ll know what to improve to get top dollar.
If your sales are at least 2 million, I’ll show you how to exit for 300% more than your current cash valuation.
Are you approaching retirement and thinking about selling your company? Book a confidential call today. If we like what you’ve built, we’ll give you an honest assessment and a fair offer. We’ll even show you what to address if your business isn’t quite ready for a new owner.
A comfortable retirement might be closer than you think.
About the Author: David Mulvaney moved to Florida from Wisconsin in 1987. In 1992, he acquired a home services company with 97.5% seller financing. By 1994, Dave converted the company to 75% commercial services and sold the company in 1998 for over 10 times the original acquisition cost. Since then, Dave owns or has owned controlling interest in profitable businesses in the following sectors: manufacturing, engineering, global distribution, home services, commercial services, e-commerce, SAAS, residential, and commercial real estate. His companies have grossed over 250 million in sales over the past 33 years.
Dave buys and builds great companies and advises entrepreneurs on how to exit profitably on their terms. To Book A Call, Go Here.