Your “Stuff” will not Save the Value of your Unsellable Business: Two Simple Rules
Going out of Business Sale: Everything Full Price,
It’s a sign that might make us laugh, but it’s not funny. It’s not funny at all when you meet a business owner who has bet their retirement on the concept the sign suggests. Too many business owners believe that the stuff on their shelves represents substantial value that they can convert when they decide to sell their business.
The truth is that most small business owners will never get the value out of their “old stuff.”
I saw this false belief for the first-time years ago when I was invited to talk to an owner about the value of his business. We met at his building, which was full of shelving that ran from floor to ceiling. All the shelves filled with boxes of parts used to build the products sold over the years.
The owner told the story of how the business started decades earlier. With clear pride, he talked about how they had sold their products around the world. It started as a story of someone who’d taken risks and built a business, but when the topic turned to sales and income, it quickly became a story of someone who had waited too long to think about moving on.
Sales were down to almost nothing, and he knew this was bad, but with a gleam in his eye, he raised his hands in the air and proclaimed. “I have all of this inventory; it’s worth a huge amount of money”. His belief was that surely someone else would want to buy up the inventory and resurrect the business.
How would I explain to him he had almost nothing? As I talked, his face reddened and he quickly interrupted and thrust a small part right up under my nose and said “smell that – that’s real rubber, not plastic.” Here he was surrounded by materials he had spent hundreds of thousands of dollars on over the years – how could it be worth so little?
That meeting, and many others like it, revealed the cruel reality that strikes business owners who believe they have substantial value in the stuff stacked on their shelf, and taught me two key rules related to valuation and the stuff on the shelf.
Rule #1: If Customers Didn’t Buy It, Whoever Buys Your Business Won’t Want to Pay for it Either
Many business owners stockpile failure. We buy 100, we sell 17, and now 83 sit on the shelf and gather dust. Why didn’t they sell? No one knows, but they didn’t, and because of that they have little or no value to a potential buyer of your business. Remember they are buying your business because they want to benefit from your mistakes – not pay for them. It’s critical owners understand that a potential buyer isn’t going to want to pay for inventory that didn’t sell.
Rule #2: People Buy Old Inventory All the Time – They Expect to Pay Pennies on the Dollar
Old inventory sells all the time, but almost always at a huge discount. The people who buy it are looking for a deal – they are not looking to pay out the owner’s retirement dreams. And these people aren’t buying businesses – they are auctioneers, eBay sellers, or others who are looking to buy very low and sell higher. You can sell your stuff – but it’s going to be at going out of business prices.
The Exceptions and the Risk
These two rules are simple and almost universally true; however, there are obvious exceptions. If your business sells gold bars, or something else with intrinsic value and high demand, the stuff on the shelf will retain more worth. But for the clear majority of business owners, the aged inventory has value only as it contributes to the successful results your business is generating.
Your belief in the value of your inventory can cost you dearly. One business owner I knew had a sellable business worth about $120,000. However, he also believed he had another $100,000 in what everyone else saw as worthless inventory. He finally agreed it was worthless, but only after he’d scared away 3 interested buyers by demanding they pay full price. Finally, he closed the doors and got nothing for the business, or the old inventory.
Inventory is a critical part of your business, and there is value in it, but it will not save an unsellable business.