I don’t mind telling you, just two months into 2019 and it’s already been a weird year. I was at my desk a couple of days ago writing an email to a business owner trying to explain why I couldn’t help him sell his business. I was having to choose my words carefully because his adjusted EBITDA is close to $1 million, and he had been told by a reputable accounting firm his company could be sold for $4 million or more. But here I was telling him it could not be sold.
What makes it weird is that I’ve had this same conversation three or four times this year, and it’s only March! Why am I seeing so many money-money businesses that can’t be sold? But more importantly, why is it that a business making so much money can’t be sold? In a word, sustainability.
The accounting firm’s $4 million valuation was right, sort of. The business is likely worth about that, but only if you’re looking at the financial statement. Once you look behind the numbers, you see the problem that is prevalent in so many businesses. The business revolves around the owner in such a way that when he/she is out of the business, the money-generating capacity of the business is greatly reduced, or even eliminated, making the business practically impossible to sell.
I remember my grandmother once warned me to not pull a loose string on my sweater. She said the whole sweater could unravel. That made no sense to me, so what does a curious 8-year do? He pulls the string, and what did I learn? Grandma was right, the sweater never fit as comfortably.
The owner of the company I was evaluating built a money-making machine for himself. He has a capable staff of seven, but they all work to support him. Without him doing his thing, the revenue would eventually stop coming in and the staff would have nothing to do.
So here is a business that, on paper, looks like it could be sold for at least four times its annual EBITDA. But any buyer will quickly figure out that without the owner, that $1 million annual EBITDA will quickly disappear. No buyer wants to pull the string and watch the business unravel.
I have already seen several baby-boomer owned businesses that fit this profile this year. More times than not, the owner learns this reality past the point they have time or energy to fix it. And truthfully, even with time, this problem is very hard to fix. Just because your business makes money and just because you have a team of people that work for you, that doesn’t mean your business can be sold. Unless your business revenue and its resultant profits are sustainable once you are completely out of the picture, you are like the comfortable sweater that is dangerously close to unraveling.
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. Jim is the author of Home Run, A Pro’s Guide to Selling a Business. https://www.amazon.com/Home-Pros-Guide-Selling-Business/dp/1599329239 . 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. The story above is true, but the names and fact patterns above have been changed to preserve the parties’ identities.
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