Brett’s “Smart Decision” Will Destroy the Small Chance He had to Sell His Business

Brett’s “Smart Decision” Will Destroy the Small Chance He had to Sell His Business

Brett wants to sell his small business.

It’s a laundromat.  Barely profitable, the location has never been much of a performer, and there’s good reason to believe it’s only going to get worse.   The strip mall where his shop is located is losing its anchor tenant, a grocery store, and less traffic overall will certainly mean less customers for Brett’s shop.

Brett wants to get out, but he’s having trouble seeing the business through his buyer’s eyes.

The Big Problem

While there are many problems with the financial performance of the business, the largest hurdle to a sale right now is the $200,000 loan balance Brett has on the equipment in the laundromat.  Since the bank holds the equipment as collateral on the loan (along with Brett’s personal guarantee), any sale will need to pay-off the bank.

Unfortunately, the most generous assessment of value on Brett’s business is $150,000, and realistically It’s more like $80,000 (that’s the price where the business will cash-flow for a potential buyer).   Brett says he would take 100k for the business right now, even though it means he’d need to come up with $100,000 to close the sale.   Get that?  Brett’s ready to bring $100,000 extra to the table if it means he can sell his business.

Because of the debt, selling the business is a problem, but Brett thinks he has the solution.

Solve it the Way He’s Solved Everything

This next part will make more sense if you understand a little more about Brett.  As a business owner, Brett’s head has always been focused on operations.  It’s one of the reasons why a laundromat appealed to him in the first place.  The laundromat offered him the opportunity to focus on mechanics.  Are the machines working correctly?  How is the new hot water system increasing efficiency?  How much money can I save by doing the repairs myself?

Brett’s an operations guy, and his business has benefited from that.  But he’s not a money guy, or a marketing guy, and his business has suffered because of that.

And he’s not done with the operations yet.

His Last Move to Improve the Business

“It’s really simple, Mike.”

That’s how Brett introduces me to the next (and last) step he plans to take to improve the business and make it more attractive to a potential buyer.

Brett plans to purchase $20,000 in new equipment.  While most of the equipment in the shop is up to date, there are two, older machines that require a bit of hand holding.  For Brett, those two machines are the fly in the soup.  Those two machines make his business imperfect.   Those two machines are what make the business unattractive to a potential buyer.  But that can change, because Brett’s been approached by one of his vendors with a special deal.

  • Two new machines.
  • $20,000 (machines usually sell for $14,000 each)
  • 0% financing for three years for the new equipment

In Brett’s mind this purchase will complete the gift wrapping on the business.  How can a buyer not want to buy a business running as smoothly as his will be after this purchase?

“It’s a great deal. . . a smart deal. “

Great Deal? 

Purchasing this equipment seems like a great deal to Brett, and certainly to his equipment vendor.  But it’s not for his potential buyers or for his chances to sell his business.

Brett’s opportunity to buy new equipment at a great discount, with good terms might make sense while he’s running the business (although his results up to this point might say otherwise), but when it comes to selling it’s simply another load placed on an already overloaded opportunity.

How does the decision impact a business owner vs. a business buyer?

As a Business Owner:

If Brett knows the existing equipment will need to be replaced in the next year or two, accelerating that purchase might be a reasonable move.

  • He can save $8,000 off the normal cost of the machines.
  • He can save the cost of interest payments.  “I’ll have the business sold before three years.”
  • He can save himself the ongoing time and repair costs of keeping the old equipment up and running.

There are benefits to this move, and it might make sense for someone running the business.

But as a Business Buyer:

This is the decision that will push the business firmly into the unsellable space.  Let’s look at the negative counter-punch to each of the positive points above:

  • He can save $8,000 off the normal cost of the machines.

Right, but the machines will still cost $20,000, and Brett expects that purchasing these machines will raise the value of his business by at least $20,000, even though the new machines do nothing to increase the cash-flow of the business.  He’s essentially raising the purchase price of the business by $20,000 without doing anything to make the business easier to buy.

Now, instead of trying to finance a $100,000 purchase price (for a business that cash-flows at $80,000), a buyer must go to the banker with a $120,000 purchase price.  How is that supposed to work?

In Brett’s mind he see’s it as solving the final problem – every buyer is going to see it as making the real problem worse.

  • He can save the cost of interest payments.  “I’ll have the business sold before three years.”

Right, Brett pays 0% interest, but his buyer won’t.  Brett is getting a special 0% offer through the vendor.  But the buyer will need to buy this equipment from Brett through his loan to purchase the business, which will certainly have interest costs.  So, Brett’s “deal” is going to make the business harder to finance and more expensive to buy.  The 0% is meaningless.

  • He can save himself the ongoing time and repair costs of keeping the old equipment up and running.

But he plans to sell the business, so this is of no ongoing benefit to Brett.  And while lowering the repair time theoretically benefits the buyer, how does this benefit his ability to sell?   Does he say to the potential buyer, “you won’t have to spend 5 hours a month repairing these two old machines like I did, so the business is worth $20,000 more?”  It’s not a convincing argument to a buyer.

Running Vs. Selling

This decision Brett is contemplating is consistent with how he’s run his business.  He’s always deferred to the importance of operations over profitability.  It’s made the business easy to operate but unprofitable to own.   Like most of us, he’s taking the “way I’ve run it” right into “the way I’ll sell it”.

And that simply doesn’t work.

After Brett makes this purchase, the business still has meager profits, but now it has a higher purchase price and $20,000 more debt to be satisfied before the business can be sold.

But that’s Brett’s solution, and it makes sense to him.

Your Buyer’s View

When looked at from the outside, Brett’s decision is a foolish one.  We can see it, name it, and call out the mistake with ease.  But as business owners we make this mistake ALL THE TIME as we think about selling our business.

  • We don’t consider that what we think is important might not be important to a potential buyer.
  • We don’t understand that selling the business changes everything.
  • We view our businesses our way – not from the perspective of the buyer.

Brett’s decision might seem like a minor one, but it’s just one more decision in a long series of choices he’s made that have resulted in benefits, and consequences, for his business.

But now, for the sale of his business, it’s the final step too far.  It’s going to make a “hard to sell” business, impossible to sell.

And it happens all the time.

Are you looking at your business through your potential buyer’s eyes, or are you “solving problems” the way you always have?

Learn to Leave.

Mike Finger

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