As Jack Webb used to say, “there are eight million stories in this naked city.” He was of course referring to Los Angeles. But there are thousands of horror stories of business owners all across the country who self-destructed for a variety of reasons. This article will deal with some real life examples.
Sellers and buyers can each undo themselves. Let’s start with the owner of a 15 year old dress shop located in a high demographic suburb of Atlanta. When I took her listing, she gave me her drop dead figure. For those of you who do not know the meaning of this expression, it means the owner would rather drop dead before he or she will accept less than a certain amount for their business.
They also use the expression “before I will let them steal my business for that amount, I will shut it down.” With regard to the case of the dress shop owner, she started with an asking price of $300,000 which was clearly excessive based on her history of declining sales. During the course of the listing, she received offers in the mid to low $100,000 range, but she could not see herself letting someone “steal her 15 year old business for such a meager amount.”
So after months of limited interest at her asking price, she made the executive decision to close her business forever and received nothing for her 15 years of blood, sweat and tears. That was one of my earliest experiences where I learned that selling a business is so personal and so emotional that some business owners would rather close their doors and receive nothing than have to live with accepting an amount that bruises their ego.
Another example of an owner who was not on the planet Earth with regard to his expectations of what his business was worth was the owner of a family owned fence company. When he and I first sat down for lunch, and I asked him what he wanted for his business, he said without hesitation that he wanted $1.2 million. As I continued to prod him for more information, it became obvious that his expectations were totally without merit. But I took the listing at his required price and started marketing the business.
In short order, it became obvious that all buyers felt the business was so over-priced that they refused to even agree to have face-to-face appointments. Then out of the blue, after working the listing for months, the business owner presented me with two previously unknown facts. First, there were significant amounts of unpaid payroll taxes that needed to be settled. And second, the owner wanted to require that any buyer agree to keep a family member on the payroll who had been receiving an above market salary and was doing little to nothing to earn it.
Long story short, I was fortunate to find a group of buyers who wanted to diversify out of the telephone industry. When they looked at the books and tax returns, they concluded that the business was worth no more than $100,000. That’s right. I said $100,000 which was 1/12 of what the owner expected and was $1.1 million less than the listing price. The owner was happy to accept this amount and was able to settle his tax liability. By the way, the family member was immediately terminated on the day of closing.
Now let’s look at a buyer who self-destructed. For purposes of confidentiality, I cannot identify the industry. But I can tell you that it was a service company with great employees and great clients. After closing, the sellers started teaching the buyer the methods that had made them extremely successful. But the buyer resisted listening and learning and started to tamper with things he should never have touched.
When they attempted to introduce him to the important clients, he resisted the introductions and behaved in an introverted manner. When they tried to explain the importance of all the employees and independent contractors, he felt the company was over-staffed.
Because the buyer had obtained a very sizable SBA loan to acquire the business, he started feeling the pressure of debt service. This pressure got worse because clients were typically billed, and he had to wait for the accounts receivables to be collected. He was undercapitalized as many businesses find themselves to be.
So he started to terminate employees or reduce their hours. He put the terminated employee’s workloads on those that remained. The happy and harmonious environment that had existed under the former owners turned sour and oppressive. Employees started looking for new employment. When they left, the owner did not replace them. The nightmare finally ended when the buyer defaulted on the SBA loan and filed personal bankruptcy. The moral of this story is “don’t try to fix what’s not broken” or “leave well enough alone” or “a fool and his money are soon parted.”
Loren Marc Schmerler, CPC, APC is the former business advice columnist for Sam's Club. He has been a business broker since 1986 and works with business owners and business buyers in every state of the country. If you need assistance selling or buying a business anywhere in the United States, you can reach Loren at 404-550-1417, 24/7/365.
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