A couple of years ago I was helping a client buy a business.
One of the businesses we were looking at had good products, a decent brand, but failing revenues and profits. The Owner had tinkered with the products over many years but had been distracted by real estate investments and an overall waning interest due to the new chapter of his life he had entered. His kids were grown, through college and on to different careers. They weren’t interested in the business. He was tired, you could hear it. He just had other things he wanted to do.
The owner was a serial inventor, with super ideas but he had let the business had tank. When I say ‘tank’ I mean it. Revenues and Net Income had dropped 50% year over year. And now, with a healthy sprinkling of fairy dust thinking, he shared projections with me that the business would be growing 183% in the coming year.
He told me about how the business was ready to take off, he had this product, that product, this patent, that patent. He said he had strong brand loyalty, and people never bought anything else after they bought his products. What a great name he had for the products, amazing conversations with retail outlets he was having, etc. To hear him tell it, he had many folks ready to buy both the products and the business.
But the numbers weren’t there and the narrative didn’t add up.
I never want to waste an owner’s time so we had put a value range right on the table at the beginning of the conversation. After we learned more, we put finer point on it: my client will pay $X in CASH for your business. We were within the range we had given him to open the conversation. We would close in 30 days.
After several painful conversations he said “David, I have to get $Y for this”.
And there it was. He went on to tell me how hard he’d worked, how much value the IP and Brand had, and he couldn’t take anything less than his number. But his number was way outside of our range. We passed on it, right away, without hesitation. Because it wasn’t worth what he wanted.
The bottom line is this. You may have awesome products, intellectual property, patents, copyrights, process, brand presence, and even customer/client relationships. But buyers really pay for a predictable stream of future cash flows. More for demonstrated growth.
Brand without revenue has less value. Revenue without growth has less value.
Don’t wait until you want or worse have to sell to engage in understanding what actually will sell.
Epilogue. I told this owner exactly what he needed to hear but didn’t want to hear. He had lost a cash buyer, and believe me, cash buyers don’t fall off of trees. He took my advice, he’s back to the grindstone but to date has not been able to find an interested buyer.