Tuesday, 10 July 2012

"You can't always get what you want"

The title to the 1969 song by the Rolling Stones seems to echo what the market is telling many business owners these days. 

There is no question that prices for many businesses are down and for various reasons.  But if there are offers on the table, a business owner must take a hard look at any offers and be realistic as to what has to change in the business or the economy for the price to go up.

In a recent evaluation of a local  clothing apparel retailer cash flows were $50,000 in each of the past 3 years.  This small business has been in the area for well over 15 years and has branded themselves a bargain retailer with a strong local following and low cost overhead. 

The more recent economic times have hurt this business; however, the owner is 65+ and wants to be able to sell for $300,000.  At that level the sale will fund his retirement plus, based on the capital investments he has made over the past few years, this seems reasonable to recoup some of those investments.

An offer of $115,000 is quickly dismissed without much thought. 

Unfortunately, what needs to be considered are the terms and the prospects of meeting the owner’s expectations. 

The terms of the offer were positioned favourably for the owner who needed only to provide minimal transition training and carry a very small vendor note.  More importantly, if you consider the $300,000 asking price this business would need to increase cash flow by nearly 3 times for buyers to make sense of the rate of return. 

Combine that with the fact that buyers typically take a 3-5 year view of historical performance, makes a successful transaction unlikely.

With the prospect of needing to continue to work a number of years and (perhaps more daunting) work at a pace that will triple current results this business owner might be best suited to work with the offer he has in hand.

Do you have small business questions you would like answered about this article or others?  Please visit www.VRWindsor.com or call 519-903-7807. 
William Sivell is a sales representative of VR Windsor Inc., Business Brokerage; his blog appears every Tuesday.

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