“You have to understand, Jim, people in this industry have a real attachment to their business. It might just be a thing to you, but for us, it’s our life.” Randy (not his real name) and I recently met at a conference. He came up to me after the session I led on preparing to sell a business and told me he had just started to think about the process. He didn’t tell me his age but I assumed he was past 70, though he still seemed sharp as a tack. He said his wife had been diagnosed with a weird kind of cancer, so the idea of selling the business and slowing down had suddenly become a consideration.
I had a special affinity for Randy and his business because he lives in a small town not far from where I grew up. In fact, the town where he lives was one of my high school’s big rivals back in the day. I have lots of good memories from my days growing up in southeast Missouri.
Anyway, Randy said he was ready to talk about selling his business, but after our conversation, I surmised that his obvious attachment to the business might make it difficult to get a transaction completed. Though Randy did not take over the business from his father, his dad had worked in the same industry, so Randy considered his business a legacy. As we talked I learned more about his business, and also how deeply he believes if you treat your business “like family” then everything will work out. “That’s how we do it in our industry,” he said to me more than once. I didn’t say it to him then, but I knew at some point Randy would have to understand that his emotional attachment to the business might affect its valuation.
We met a couple of times after that first meeting, and I learned a lot more about his business. Over the years, Randy had refused to make some hard decisions about improving his business. Some employees stayed on too long, some products were left in inventory for the occasional customer who needed it “just in case”, and some customers who didn’t pay on regular terms still continued to get favorable terms.
“That’s how we do it in our industry.”
Simply said, Randy is making decisions in 2017 with a 1987 mindset. The net effect of this mindset will negatively affect valuation, even assuming we can get the business sold. Revenue is not growing, there are too many employees, competition is closing in, and his business systems are not up to date. Sure, a buyer might see “opportunity” in all this, but it will take an investment of time and money to see those opportunities manifest in profit creation. All in all, there isn’t much value in Randy’s business that will transfer to a new owner.
Randy’s “that’s how we do it in our industry” attitude pervades many of the business owners with whom I meet. They are well intended and honorable in their thinking, but by creating an emotional bond with their business and their industry, they tend to not make hard decisions to keep their business healthy… a problem that is magnified when it comes time to sell. As the old saying goes, the chickens have come home to roost.
JIM CUMBEE is President of Tennessee Valley Group, Inc. a retainer-based business brokerage and transition mediation firm in Franklin, TN. Cumbee is an attorney and has an MBA from Harvard Business School. He has a wide range of corporate and entrepreneurial experiences that make him one of the most sought-after business transition advisors in the state of Tennessee.
Tennessee Valley Group
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