By Stephen Bethel, National Director, Frazier Capital Valuation
Deciding on the value is the first step in getting ready to sell a business, including auto dealerships. If you are a buyer, understanding the type of seller you are dealing with as you go through the valuation process can be useful because it helps determine the seller’s willingness to negotiate.
A warning: Unrealistic expectations on either side can lead to a failed deal.
Seller Characteristics
Generally, sellers of dealerships can be divided into six groups:
- the “blue sky” group;
- those who obtain a sale price in order to maintain their income or life-style;
- those who think they should win the lottery, or be compensated $10,000,000 for all of their hours of work;
- those who think that they should be substantially compensated for their assets which they purchased at liquidation prices at auctions;
- those that value their business based upon faulty consultant information (also formula sellers); and,
- realistic sellers who understand the process of selling a business.
Their characteristics include:
The “Blue Sky” Seller
The blue-sky group thinks that they should be compensated for a large amount of goodwill or “blue sky” over what the business is worth. This may make sense. However, the company needs to be profitable, not be in a commodity industry, and be able to have returns over and above the industry average return. I have seen many sellers insist on being compensated for blue sky (goodwill), even though they are losing money.
The “Maintain Life-Style” Seller
Many business owners have made a good income from their businesses and therefore are accustomed to a particular life style. When they realize that they will earn a lower yield from the proceeds of their business sale, they tend to increase the sale price until they can back into the return desired.
The “Payback” Seller
Many owners have worked all of their life at a business and feel that they should be compensated for all the time which they have put into the business. Since sellers have put thousands or “millions” of hours into the business, they need to withdraw all of those hours, similar to a bank withdrawal. Often, a seller cannot forget the amount of time and expense involved in a certain project.
The “Assets are Worth More Than Cash Flow” Seller
Then there is the seller who wants the buyer to know about all the great deals on the assets that he or she purchased in the way of machinery and equipment at auctions and how valuable they are today. Business brokers cannot compensate an owner for both the sale of his business, and also for the assets. If the assets are contributing to the cash flow of the business, then they cannot be separated. A seller may want to sell the company but keep most of the assets. This is just not possible, unless the price is reduced by the value of the assets taken by the seller.
Usually new assets translate into more cash flow, although this is not always the case. Sometimes a seller will have invested heavily in new capital equipment, which does not make a dent in the cash flow.
The “Bad Counsel and Formula” Sellers
Sellers are often misinformed. They may believe that pricing is based upon the price earnings ratio of publicly traded companies (after tax, and not pretax) or some percentage of annual gross sales, and/or receiving bad information from an accountant or attorney who is not familiar with the market or valuation. An attorney, accountant or financial planner is not going to say to his client, “I don’t think that your company is really worth much,” since these professionals may fear losing their clients.
Even worse than bad advice is the belief that a company should sell pursuant to some rule of thumb. After an owner uses a formula, it is difficult to make him or her to change his or her mind. These sellers are the most dangerous since they will stick to a preconceived value regardless of how unrealistic the value may be.
Realistic Sellers
Finally, there is the realistic seller who wants to obtain a fair price for his or her business and understands value and the selling process. Only about 15-20% of all deals actually get done. Those that fail often do so because either the buyer or seller are unrealistic.
Frazier Capital Valuation www.fraziercapital.com .provides appraisal services for business valuation, commercial real estate, and equipment, as well as brokerage services. Stephen Bethel can be reached at 213 439 9956 X102 or sbethel@fraziercapital.com.