By Robin Gagnon, GABB Business Broker
When selling a restaurant or other business, the potential or opportunity for the future is seen as a reason that a buyer should invest. That’s because a business’s future prospects make the listing more attractive to buyers. The buyer will see the listing as a better long-term opportunity.
When it comes to pricing the business for sale, however, Business Brokers must set a price according to common lending practices and standard valuation methods. That means that “Blue Sky” or potential for the future is not something buyers are willing to pay for, nor are lenders going to loan money upon. A buyer will only pay for the past performance and a bank will only lend on past results.
Here’s why buyers will not pay for the “potential” in your business.
Lending is trickier.
Most lenders avoid any open and operating businesses built on a pro forma. This is the Latin words for “to form.” It is standard practice to develop a pro forma in a startup situation where there are no existing metrics to rely upon for sales and earnings. The commonly accepted definition of a pro forma is, “assumed or forecasted information presented in advance of the actual or formal. The objective of a pro forma business plan is to give a fair idea of the revenue, expenses and earnings in anticipation of the actual occurrence
If a business is not open, it’s easy to formulate underlying data points and put them into a business plan to forecast the pro forma earnings. The only problem with this method is that pro forma financial statements estimate how the actual statements will look if the underlying assumptions hold true.
For open and operating businesses, the underlying assumptions have already been put to the test. Now we have actual statements and actual performance. The underlying assumptions may be revealed as flawed or inaccurate. If a restaurant owner built a pro forma based on sales of $6000 per week and the actual performance is only $4500 in sales per week, that fact is now known and therefore, must materially adjust the pro forma.
Riskier for the Buyer
The second reason that “potential” cannot be factored into the selling price of a restaurant is that all the risk, effort and financial commitment to meet the business potential belongs to the buyer, not the seller. If the business sales don’t live up to the touted “potential,” it’s the buyer who is still going to have to pay the employees, the rent and the loan.
Potential to Improve the Business
That doesn’t mean that business owners shouldn’t work on their business’s potential. In our earlier example, there is “potential” is to increase the number of customers each day and improve the volume to the original forecasted point. That, however, may require any of the following conditions be met:
- Investment in Advertisement
- Investment in Marketing
- Change of Concept
- Improvement in Service
- Change in the ingress/egress to the business
- New Residential or Commercial Development
- Improved Signage
- And the list continues
For an open and operating business, that means the buyer must invest some level of energy, effort and/or financial resources to improve the current performance of the business. That investment and effort is on the part of the buyer, not the seller. Therefore, the “up-side” or “potential” is still unknown, can’t be quantified and thus, can’t be sold on the front end of the listing.
The next time you consider selling your restaurant or other business and offer up “potential” as a reason to buy, just remember, it cannot factor into the listing price. It is a definite selling point and makes a business more attractive, but is not part of the valuation model.
This article was adapted from the blog of Robin Gagnon, co-founder of We Sell Restaurants. Robin has completed the study and testing to attain her Certified Franchise Executive (CFE) designation offered through the International Franchise Association.Read More
I chat with various business owners every day and hear of a variety of businesses in nearly every imaginable business sector. The businesses that give the best first impression are those that appear well organized, are relatively clean, and where the business owner has books and records readily available. This gives me an indication that the business is most likely well run and that the owner has given some thought and preparation to the idea of selling his/her business.
What is the first thing people do when they decide to sell their car? Many take the car and have it professionally detailed. Those that don’t have it professionally detailed at least either take it to the car wash for a wash and wax, or spend the time and energy to wash and wax it themselves. Will anyone pay top dollar for a car with layers of dirt and bird droppings crusted into the paint? Not likely.
What do people do when they are going to sell their house? Many times they will paint the house, do a bit of landscaping and clean things up so the house shows well. Will anyone pay top dollar for a house that is dirty and cluttered with foot high weeds in the lawn? Not likely.
When it comes to business, the psychology is pretty much the same. I have seen manufacturing shops so clean you could eat off the floor. And, I have seen shops so filthy I didn’t want to sit, lean against, or touch anything. Interestingly enough it seems to be the latter where the business owners insist their business should command top dollar.
A buyer is not going to pay top dollar for a business that appears dirty, cluttered, disorganized and has either no books and records or records that make little to no sense.
GABB member Loren Schmerler recommends that before putting a business on the market, the owner should fix all interior and exterior problems. Fix parking lot holes, replace dead shrubbery, clean the windows, fix the roof and/or paint the exterior to enhance curb appeal. Fix stained ceilings, replace light bulbs, repair and repaint walls, get workers to clean their desks.
“When the buyer tours your business, you want them to visualize becoming the owner and being proud to do so,” advises Schmerler.
The bottom line is that as a business owner, investing a few thousand dollars to have a professional work with you in preparing your business for sale will in most cases give you tens of thousands of dollars or more in return.
This article is taken from the BizBen blog. Peter Siegel is the Founder & President Of BizBen.com & BizBenNetwork.com (National version). He consults daily with intermediaries, buyers, owner/sellers & advisors daily about buying and selling businesses.Read More
By Diane Conklin
Diane is the founder of Complete Marketing Systems. She will be speaking on Wednesday, Aug. 21, to the Georgia Association of Business Brokers meeting at the Georgia Association of Realtors auditorium at 6065 Barfield Road, Sandy Springs, GA, 30328. More information on the GABB blog.
Marketing sometimes gets a bad rap…
People will say things like “it’s yucky” or “it makes me feel dirty” and the list goes on and on.
If that’s true for you, then what you’re experiencing is Not Marketing – at least not marketing done the way it should be.
Marketing can be defined in many ways. Simply put, it’s really everything you do in your business to put yourself in a situation to sell your programs, products and services.
While that may seem like a big, broad definition, if you think about it, it may be the truest definition of marketing you’ve ever heard.
So, what does that really mean?
It means that marketing is about building the relationship with your prospect and your client so they will want to know more about you and what you do and then buy from you.
By that definition what does marketing include…
√ Social Media √ Articles
√ Emails √ Interviews
√ Snail Mail √ Speaking
√ Print Ads √ Ads
And, so much more…
If you put you in your marketing and stop thinking about it as some formula you have to follow or how you can use the latest tactic to get a sale, you may just discover that marketing is fun.
Marketing is how you let your clients and prospects get to know you a little better, it’s how you ultimately SERVE your clients and how you make money.
Do some people use tactics that might not resonate with you? Sure, they do. We’ve all had less than stellar experiences with people marketing to us or trying to sell us something that didn’t sit right with us.
The key for you is to not do those same things…to be more personal, caring and to come from a place of serving and doing what’s right for your clients and prospects (please don’t think I’m saying here that the client is always right – I don’t believe that, but that’s a discussion for another day).
I’d love to hear your feedback or stories of great marketing.
- (866) 293-0589
- Email: email@example.com
Find out how you can harness a simple, effective marketing strategy to grow your business when internationally known author, marketing and business strategist Diane Conklin speaks on Wednesday, Aug. 21, to the Georgia Association of Business Brokers. The GABB is the state’s largest association of professionals dedicated to buying and selling businesses and franchises.
Diane’s topic, “Marketing Success Secrets: How To Grow Your Business & Attract More Ideal Clients With Simple, Effective Marketing Strategies,” will include tips specifically aimed at business brokers and their clients.
The GABB meets at the Georgia Association of Realtors at 6065 Barfield Road, Sandy Springs, GA, 30328, and the meeting will last from 10:30 a.m. to noon preceded by a free light breakfast networking session at 9:45 a.m. Rob Tamburri, CPA PFS, managing partner of Balog + Tamburri, CPAs, is the sponsor of the meeting.
Diane is a direct response marketing expert who specializes in showing business owners how to turn their businesses into money making machines using rapid profit acceleration, leveraged business growth and strategic implementation by integrating their online and offline marketing strategies, media and methods, to get maximum results from their marketing dollars with Complete Marketing Systems.
For more than 25 years Diane has been leading small businesses to bigger profits through her coaching, consulting, marketing funnels, systems, live events and by providing done-for-you services to clients all over the world. As the founder of Complete Marketing Systems, Diane has been involved in many campaigns grossing over $1,000,000.00 several times in her career, and she routinely helps people grow businesses to six figures, and beyond. Diane was voted Glazer-Kennedy Marketer of the Year for her innovative marketing strategies and campaigns and was nominated for Atlanta Business Woman of the Year.
The monthly meeting begins at 10:30 a.m. and is preceded at 9:45 a.m. by a free light breakfast and networking session. There is networking with coffee and pastries from about 9:45 to 10:30 and the meeting will last from about 10:30 to somewhere between 11:30 and noon.
The GABB is the state’s largest and oldest association of professionals who specialize in brokering the purchase and sale of businesses and franchises. Broker members help owners determine the asking price of their business, create marketing plans and strategies for selling their business, identify and qualify buyers, and have the knowledge, experience and skills needed to help maintain the confidential nature of the process. The professionals of GABB relentlessly pursue professional development so they can provide superior, ethical services for all customers and clients. Affiliate members include bankers, lawyers, appraisers, insurers and other professionals who work closely with brokers to help owners and buyers get to the closing table.
For more information about GABB, please contact GABB President Dean Burnette at 912-247-3209 or firstname.lastname@example.org, or GABB Executive Director Diane Loupe at email@example.com or 404-374-3990.
Before you begin your business, you should be thinking about how you will hand that business over to someone else. No one runs a business forever. Whether you sell your business or let a relative inherit it, at some point you will need to step away.
When you finally do separate from your business, it is critical that you are certain that it is worth handing over. In his January 2019 article in Forbes magazine entitled “Make Sure Your Business is Worth Handing Over,” author Francois Botha dives in and explores this very topic.
In this article, Botha emphasizes that family businesses should not “fall into the trap of prioritizing job creation for their children.” Instead, that the priority should be to perpetuate the business. Botha cites the co-founder and chairman of The Leadership Pipeline Institute, Stephen Drotter, who feels that the main goal of any business needs to be its suitability.
Drotter established five principles designed to assist family businesses as they seek to prepare for succession. The first principle is to “Identify and Fix Your Problems.” Current ownership should deal promptly with any business problems before passing a business on to a new generation.
The second principle Drotter covers is to “Adjust Your Management to the Strategic Evolution of Your Business.” Businesses evolve from the creation of a product to sell to focusing on sales, marketing and distribution to finally addressing a plateau in sales which facilitates the need for multi-functional management.
The third principle cited by Drotter is “Talk to Your People About Them.” In this principle, communication with employees is key. Getting to know and understand employees is vital.
“Be on the Lookout for Talent Everywhere,” is the fourth principle. There is no replacement for skilled and motivated employees, and you never know where you may find them.
Finally, the fifth principle, “Provide Development” emphasizes that “almost everything is learned, and somebody often taught that which is learned.” Employee skill must be seen as a key priority.
Making sure that a business is ready for transition to the next generation involves careful preparation and a good deal of advanced planning. The sooner that you begin asking the right kind of thoughtful questions about the current state of your business and what will benefit it moving forward, the better off everyone will be.