What does it mean when someone says, “I sold my business?” Is it a real business sale or just a fluffed up story? Why should you care?
Hearing about the sale of a small business can be confusing, especially when you know that the owner never made any money. But if they "sold the business" it must mean something wonderful happened, right?
At Exit Oasis we talk about the importance of understanding “my results buy my business”. If you want to sell your small business someday, you need results that, at a minimum, meet a potential buyers two basic needs. So, what does it mean when you see a business “sell” even though the business had poor results?
Experience with business sales will tell you that you can't look at a business sale for the outside and know what went on with the transaction, or what was really going on with the business.
- Perhaps the seller had better results than you think.
- Maybe the buyer made a horrible purchase and the seller just got lucky.
- What if the seller offered the business assets at a very low price?
- Maybe the seller calls it a “business sale”, when really they just found a quiet way to go out of business.
From the outside, all we see is "Jim sold his business", and we know Jim's business was failing. It doesn't make sense, and it goes a long way towards reinforcing the idea that there is some secret formula out there that gives a small business great, hidden value (a very dangerous and common belief of small business owners.)
Jim sold his business and he never made a penny when he was running it. I'll be able to unload this place no problem.
This isn’t a question of judging the seller. If they want to tell their story as one where they “sold their business” that’s up to them. The listing broker will certainly label it a successful sale. What we’re calling out is the difference between “selling your stuff” and “selling your business”. Knowing the difference can help you avoid making dangerous assumptions about your own small business.
Most businesses have assets with intrinsic value: equipment, real estate, inventory, etc. Remember that a company vehicle has a certain value whether the company makes money or not. But beyond the intrinsic value of the things that a business owns, there’s an opportunity to create value that's based on the successful results of the business. That value is created when the things a business owns combine to produce financial results well beyond their intrinsic value. Suddenly your $30,000 of “stuff” produces $300,000 in Seller’s Discretionary Earnings – and selling that is what we mean when we say someone “sold a business”.
When someone sells a small business in a transaction where no value is assigned to the results of the business, in reality the owner "sold their stuff" (equipment, contracts, name, etc.) And the sale of business “stuff” results in a dramatically lower price – often pennies on the dollar. Don't believe that? Think of what kind of deal you expect when you see a “going out of business” sign. Do you go in ready to pay full price?
Selling your stuff is not the same as selling your business.
We all know we can probably sell our equipment if we're willing to discount the value to a low enough number to attract buyers. But that kind of liquidation is rarely what owners aspire to do when they say "I want to sell my business someday."
So don’t let someone’s "I sold my stuff" story, repackaged as an “I sold my business” story, cloud your understanding that "my results buy my business". It's the only way to ensure your ability to sell your small business when you want, the way you want, for a price you want.