PEMBROKE, Mass. — At one time or another, most dry cleaners think about selling their businesses. They’ve been working for many years, the challenge is no longer as exciting as it used to be, and their income needs, what with the children grown and retirement income kicking in, are less.
But there are pitfalls. If the negotiation goes poorly, the results could be disastrous. Either the prospect pulls out at the last minute, the full payment is not received, or there’s a lawsuit involving deception. All are things you don’t want to experience.
Here are some ways to avoid a disaster:
USE FORMULAS TO CREATE A SELLING PRICE
Many dry cleaners argue that you just figure what you need and that’s the selling price. That’s poor strategizing. Using a formula helps you arrive at a figure and determine what your business is really worth. It’s the structure around which you dicker.
There are several formulas to determine selling price. Most of them work on some version of a multiple of net profit over the last three years, giving more preference for recent years. This profitability factor translates to what the business is worth, and is used to assess the 15% to 30% rate of return a buyer wants to achieve. So, if a buyer wants to achieve a 15% rate of return, and the business churns out a $30,000 net profit per year, the buyer will not pay more than $200,000 for the business (because a $200,000 investment will return exactly a 15% return of $30,000, which is the current profitability).
With this formula, buyer and seller have figures to help make the negotiation specific. For example, there can be discussions about the definition of real profit, the number of years considered, asset value, and demanded rate of return. By breaking down these elements, the parties can build a working agreement from the bottom up. A business broker is your specialist in valuing companies.
TAKE YOUR MONEY UP FRONT
Some operators disagree with this point because of the significantly higher tax liability. Better to take payment over time, they say. No way. An “over-time” payout is a recipe for disaster, because most result in the seller not getting his full sale price.
I can add my personal experience here. I have sold two businesses, one with an “over-time” payout. I chose that method because the tax burden would have resulted in a 20% savings over five years. Moreover, the buyer had owned a $4 million business, and he had enormous financial resources. I thought he was a sure choice. However, what actually happened was my business and the buyer clashed. He had a breakdown of sorts and the money flowing to me stopped. My choice was to take over the business, as it was, or to take a lump-sum payment that was $200,000 below my expectation. I chose the latter, because the business was in such reduced condition that I didn’t want to return to it. I was smarter my second time around and demanded and received full payment up front.
To me, there are no conditions that would make “over-time” payouts acceptable. Too many things can go wrong. Yes, raising the necessary money is always an issue. But, a buyer has options. He can borrow from family and friends, remortgage his home, take on a financial backer, or negotiate with a bank. A going business always attracts capital.
BE WILLING TO COMPROMISE
Too many dry cleaners say this is the price, take it or leave it. That’s why many transactions break down. Compromise is the order of the day.
You must be flexible. You need to look at the transaction from the point of view of the buyer. Each party stands to gain: you get out of running your business and get paid for it, and the buyer gets a business to run. Therefore, each person will need to compromise. Both parties need to realize that nothing is written in stone.
Having said that, you want to be sure, before the negotiation begins, that you come out satisfied. If your business is going downhill, maybe what will make you happy is coming out with $75,000 after paying off bills. To arrive at such a realization, you should have in mind what’s next.
If your price is $500,000 and that amount is barely enough to do what you want to do next, then even a $30,000 compromise will pain you. Set up a price that gives you wiggle room, so that the compromise price will leave you satisfied. Otherwise, you’ll be dickering in a poisonous atmosphere. If you can’t come up with a reasonable figure, then maybe it’s best to postpone the sale.
Pay attention to these guidelines. They may save you thousands when you actually decide to sell.
Information in this article is provided for educational and reference purposes only. It is not intended to provide specific advice or individual recommendations.