Tools for Success-Know When It’s Time to Sell
The first article in this series listed more than 25 tactics to increase your business success, all of them based on my experience. I started with nothing. I didn’t get to college, so I know you can achieve maximum success, no matter what your level of education. E-mail me to get the first article (or any others) in the series. Each one, after the first, takes a closer look at one of the tactics.
In my business consulting practice, I regular get calls from owners wanting to know whether they should sell their salvage yard. In most cases, the business is family-owned.
Here’s what I have learned: As we get older, we become more risk averse. In many cases, I find a dad who won’t sell because his son isn’t “ready” yet. When I find a willing seller, I often find he wants between 3 and 10 times what the business is actually worth.
The real kicker is many of these sellers are so risk averse that they want all cash. Who can buy a business for all cash? A son or daughter buying a small- to mid-sized family-owned business rarely has the cash. Few employees have the cash to close a deal with those terms.
If you are reaching retirement time, you should be thinking about succession planning. What is your exit strategy? I know you don’t want to retire. I’m 62; I hear you. But, there is a right time to sell and pass the business down to someone with the same destroy-the-competition desire you had when you started it.
If you’re 55 or older, you need to be thinking about succession. You need a 5-year minimum planning window. I love helping clients create succession plans when they’re proactive.
The saddest situations I face as a consultant are those in which a gifted entrepreneur spends a lifetime building a business but never plans his exit strategy. Because he can’t bring himself to sell at the top, he often can’t sell at the bottom.
Have your sales dropped 2 years in a row? If they have, you need to read this article closely. Your business is losing value. You should be thinking about the changes you need to make.
The should-I-sell-call I get is usually a variation on these themes: Sellers want too much for the business they started, or they have a potential buyer, but won’t offer financing. As far as valuation of salvage yards, with few exceptions, a business is never worth more than one times annual sales. Often, half of annual sales is right. That number does not include the value of the land. Many other factors are important, especially operating income, but that’s for another article.
So you’ve got a buyer, but you won’t finance? How many buyers will you encounter over the next few years? If you’re over 60, what will you do with the cash? Earn 1%? Why not finance at 7% over 20 years, and add an option to buy the land later?
Too risky, right? The buyer might fail. Consider that, in most cases, the down payment and monthly payments will be more than you would have gotten in liquidation. Of course, you should be prudent in choosing a buyer. Be diligent. Most of the calls I get are about selling to an employee or to sons who have worked in the business, which is lower risk than selling to an outsider.
Instead of taking a decent offer with some risk, the owners hang on and watch the business dwindle. Employees leave. Eventually, they close and liquidate by auction or scrapping out. I recently saw a salvage yard that the owner had sold for $500k — but he would not take $50k down — sell at auction for less than $50k. It was painful. He wiped out $450k, plus interest, in value.
Another friend wanted $75,000 for his motorcycle shop and $125,000 for the land, but he wouldn’t finance it. He said the inventory was worth that. Finally, after a year, after employees left, he closed the shop. He sold the land AND business for $125k, taking $10k down. He was left with few options because he couldn’t run it alone.
Don’t let yourself get in this trap. Think about your exit strategy. You can sell it to your kids; keep an office and modest salary as the founder. They want you to take bank deposits and stick around for moral encouragement. Spread the value over 20 or 30 years so you get monthly income. Your kids know the business and can pay a little more than it is worth. They will appreciate the opportunity to own your business, just as you did when you started it.
Ron Sturgeon, Mr. Mission Possible, has been a successful business owner for more than 35 years. As a small business consultant, he can deliver wisdom and advice gleaned from an enviable business career that started when he opened a VW repair business as a homeless 17-year-old and culminated in the sale of several businesses he built to Fortune 500 companies.
Ron has helped bankers, lawyers, insurance agents, restaurant owners, and body shop owners, as well as countless salvage yard owners to become more successful business people. He is an expert in helping small business owners set the right business strategies, implement pay-for- performance, and find new customers on the web.
As a consultant, Ron shares his expertise in strategic planning, capitalization, compensation, growing market share, and more in his signature plainspoken style, providing field-proven, and high-profit best practices well ahead of the business news curve. Ron is the author of nine books, including How to Salvage More Millions from Your Small Business.
To inquire about consulting or keynote speaking, contact Ron at 817-834-3625, ext. 232, rons@MrMissionPossible.com, 5940 Eden, Haltom City, TX 76117.