Your Future Will Die in the “Sell a Business” Grinder
There’s no gentle way to say this: John is delusional about the value of his business. He’s convinced it’s worth $500,000, even though:
- Revenue is $100,000 per year.
- He only clears $20,000.
The business is not worth half of a million; in fact, it’s not sellable at all. But John thinks it is, he wants $500,000 for it, and he’s in good company. Many small business owners think what they have is worth more than it is. Often, their belief is based on this faulty assumption:
This business is my future. While the business has not been financially successful yet, I believe it will be. We’re so close. Profits are coming, and I shouldn’t miss out on that potential just because I sell the business. After all, I created the business that makes that future possible.
To be fair, owners never actually say that. What they say is something like:
- "A new owner would make a killing if they did these three things."
- "Sales are about to take off because they are putting a McDonald’s in around the corner."
- "Our next model is going to perform better than all the rest have."
Have you ever thought that way about the value of your business? If you have, it’s understandable. You are overworked, underpaid, and desperate. You haven’t seen the reward for your past labor, and you hope the payoff is in the future. It must be there. It just has to be. Your plans depend on it.
Oh, if dreaming made it so.
Instead of dreaming, it’s time to wake up. Stop thinking about the unrealized future, and think instead about buying a cow.
What Cows Make Clear
I grew up on a small “hobby” farm. Having a “hobby” farm apparently means you work all day at a full-time job, and then come home and spend the money you earned in that job trying to make money on your “hobby” farm. It was a great place to grow up, but not a very lucrative hobby.
We had cows. Never more than a couple, and never cows that we had to milk (having those is just crazy), but we always had a few beef cows to raise and then butcher. So, every year or two we had to buy a new calf. And for that, we’d go to a local farmer (not hobby).
That farmer would always sell the cow to us based on weight. Young, small calves were less expensive, while older and heavier cows cost more.
Why? Commonsense. The more cow you buy, the more value you have. Bigger meant stronger, healthier, and you could, theoretically turn that heavier cow into more pounds of hamburger right after you bought it.
More cow + a meat grinder = more hamburger, or more real value transferred. This was the simple value equation: a cow with more meat is worth more.
That said, we almost never bought a cow because we desired its current weight. We bought the cow because we knew that over time the cow would grow. We bought the cow's future.
My Moo is Mine, Your Moo is Yours
Everyone knew that cows get bigger, including the farmer that sold it, but never did I hear a farmer say:
Listen, if you feed this cow more corn she’s going to pack on the pounds, and I deserve to be paid for some of that weight . . .
The farmer only got paid for the results he generated when he owned the cow, and we benefited when the cow grew after we bought it.
Potential for growth was assumed by everyone.
And risk was assumed by everyone, because sometimes cows die. And when they do, everything you’ve done, all the work, time and investment is lost. That was the risk we took as trade-off for the potential reward of future weight gain. We knew we could shrink that risk by buying a bigger cow or eliminate it entirely by buying hamburger at the store – but in those scenarios we’d give up all the opportunity for growth.
It was about potential and risk.
The farmer got paid for the REAL weight gain that took place before the sale, not on some theoretical future fat cow. Their work had produced a certain result, that’s what they could sell, and then it was up to us (and fate) to see what came next.
Good or bad, the future belonged to the new owner. Farmers understand that.
Why don’t small business owners?
Fancy Deals and Fancy Terms
"That internet start-up sold for billions before it ever earned a penny."
"Did you see that deal on Shark Tank?"
"They could make millions with my designs." (that’s a direct quote from John.)
Earn outs. Discounted future earnings. Royalty deals. There are so many real ways that business owners’ cash-in on the unrealized future. These terms and deals are real. We see the stories all the time. Brokers hold them out as examples of the magic they can create. They really happen to some owners.
But they are not going to happen to you.
Small business owners who actually want to sell their business someday are best served when they accept that their business’ future belongs to their buyer.
You get paid for what you've done. A proven track record of real results becomes meat on the bones of your business. That’s what you get to sell. That's what establishes your value. If you’re a normal, average, in the majority, small business owner, these “future value” deals will not happen when you sell your small business. You’re selling a cow under normal circumstances. Your business is not special. You are in the 1,000. You are not the 1.
Your value is based on the results you’ve created, not on what the new owner might do because"they are putting a McDonald’s in around the corner."
No doubt there are brokers reading this with itchy fingers. They are screaming, “I just did a deal with an earn-out, it happens all the time.” (Also they’ll want you to know that they “can sell your business for you at top value”.) These deals happen, but they are the exception. If you focus on being the exception you are making a very dangerous bet. If your plans require you to get paid based on the unrealized future, the sell a business grinder is going to be a killer.
An unattained future will not overcome a skinny past. It’s that simple, but simple can really suck, especially when you own a skinny cow.
How Most Small Business Owners Should View the Value of Their Business
With apologies to business valuation experts who deal with some very real and complex “future earnings” situations, most small business owners benefit from taking a very simple approach to the value of their business.
Say it out loud: My results buy my business.
John hasn’t created a business with results – it’s a skinny cow; accordingly, John’s business is not worth $500,000. It’s not really sellable at all. That reality was hard for John to swallow, but the odds say the same applies to your business if you're not producing results.
Why are results important? Because a buyer’s reality demands them.
Your buyer will use the profits of your business to make the payments on the debt they take on to buy the business. No results = no money to pay the debt = no sale. That’s reality for almost all small business sales. The exceptions hardly seem worth mentioning – yet those are the stories we hear about all the time, and we want to hear them. We need to hear them. They give us hope, especially when we have a small business that doesn’t produce results. Lack of results is why most small businesses don’t sell.
While we want our business to be valued based on the unrealized, rosiest future, for most, any value in that future belongs to a new buyer. For the existing owner, the future dies in the “sell a business” grinder. Stop complicating your perceived value of your business and keep it simple.
Your future can include the successful sale of your business, but you have to see value by understanding that my results buy my business.
Next time you start to get grand ideas about what your business is worth, next time you start planning your retirement based on the unrealized potential of your business . . . take a minute, grab a hamburger, and consider the simple, real way most small businesses get valued and sold.
It’s time to ask: Will I be able to sell my small business?