Can I Just Burn the $70,000 Instead of Buying your Business?
It looked like it might be a match.
While searching for a business to buy years ago, I started a conversation with a small business owner. By the end of our initial meeting I thought his business might be a fit for what I was looking for.
The owner said he wanted $350,000 for the business, and he was willing to share tax returns with me, so I dove in for a basic evaluation.
Here’s what I found:
- The owner and his wife both worked part-time in the business and between them took $30,000 a year out of the business (total owner’s cash-flow) for the work they did.
- The work the owner’s wife did would cost about $20,000 to hire out once I bought the business if I didn’t want to take on her workload as well.
- That left cash-flow of about $10,000 to work with.
- The real estate included with the deal had a value of $150,000.
I took those numbers and plugged them into the reality I would face if I bought the business.
- At full price, if I paid 20% down ($70,000), I would need to finance $280,000.
- Monthly payment on that $280,000 was roughly $28,000 per year given asset allocation.
So, essentially, I would be buying:
- The need to come up with $18,000 of cash each year to service the debt.
- The opportunity to work part-time for free.
Bottom line, this was a loser for me and really any other buyer, even with a dramatic reduction in price. As planned, the owner and I got back together.
“I’m not interested.” I told the owner.
“Why?” he asked sincerely.
I walked him through the points above.
“But there is a lot of opportunity here”, he said.
“All you’d need to do is . . . “, and he described improvements that could be made to increase the value of the business. He continued for some time trying to convince me his business was worth $350,000.
We went back and forth for a while. He didn’t understand why I couldn’t see the value he saw in the business. Not wanting to prolong the conversation on a business I wasn’t going to buy, I finally tried to explain the challenge as bluntly as I could.
“If I buy your business, I’m out $70,000 and all I get is the opportunity to lose $18,000 each year. Can I just burn the $70,000 instead of buying your business? At least then I can keep the $18,000 yearly and not have to work for free.”
Still not convinced, he paused, looked me in the eye and responded:
“But I need at least $350,000 for the business. My wife and I are going to retire in Florida and we need that money to buy a house there.”
I was shocked at the time. I thought, “what do your retirement needs have to do with what I should pay for your business?” I’ve learned since that this perspective on value is regrettably common.
Like many small business sellers, he had forgotten how important a buyer’s basic needs are when determining the value of a business.
Do you know what your business is worth?
Not what you want to get from it when you sell, but what it’s worth to someone else?