Business Mistakes 101

This small business mistake is part of a collection excerpted from Gary Schine's book 101 Small Business Mistakes

Mistake -- Pricing a Business Wrong When Selling

Pricing a business is a mixture of art and science. Few people are familiar with the art or the science, and fewer still are familiar with both. Most professional advisors such as accountants and consultants rely on the science part and use either an approach based on the assets the company owns and/or the income that it is earning. Other people use "rule of thumb approaches", most of which use a multiple of earnings, monthly sales, or some other benchmark.

In some instances these methods work because they provide a price range that both prospective seller and prospective buyer find reasonable. In other instances, they don't work at all. They are statistically derived from a number of businesses that have changed hands. Working backwards-- from the large group to the individual business-- is often not appropriate.

The bottom line is that a business is worth what a buyer will pay for it. Sometimes the formulas come up with a price that a buyer will pay; sometimes they just don't.

In some case, a business has value to a buyer that just isn't apparent based on its income or its assets. For example, I recently helped sell a business (a payroll and bookkeeping service) that was earning about $11,000 per year for its owner. The business owned about $13,000 worth of equipment. That business sold for $93,000 which was about $23,000 more than one year's gross sales. The buyer was purchasing $70,000 per year of new business. He reasoned that to gain that amount of new business through traditional methods like advertising and personal selling would cost far more than it would to buy the business.

Further, the new owner, who already owned a payroll and bookkeeping service, did not have to take on the old owner's overhead. He had the computers, the staff, and the office facilities, and his resources were not operating at capacity. To him, it was buying $70,000 worth of business with perhaps $25,000 of new overhead expenses. At the selling price of $93,000, his investment was returned in less than 3 years.

In selling a business, look at the "rule of thumb" formulas, and ask the experts for an opinion. Then ask, "Who might that business have value to and why?" There may be value that is hidden from the formulas. It may have appeal based on economies of scale (as in the example above). It might be worth it to a competitor to buy your business just to eliminate a competitor. It may have value to someone for emotional rather than rational economic reason.

Other Business Mistakes and Misconcetions

• Failure to Prepare a Business Plan
• Myth-- A New Business Must be Based upon Uniqueness
• Overspending
• Momentum
• Starting a Business for Reasons other than Market Demand
• Entering into Partnerships without Clearly Defined Roles
• Not Putting Partnership Agreements into Writing
• Organizing A Small Company as a Large Company
• Misconception-- A Product Can Be So Good, It will Sell Itself
• Not Understanding Your Product's Benefits
• Believing That Experts Have Magic Answers
• Not Pricing Based on Benefits to Buyer

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