We’ve shared before various reasons that businesses don’t sell, but sometimes the advice we give to sellers after we’ve looked at everything is not to sell, but to liquidate and close. This isn’t because we’re excited about possibly missing a commission, but because what might be a short-term gain for us, it probably won’t give the seller enough or work out to be a long-term win for the buyer.
An example we’ve seen before is when a family owns the real estate that a business operates on, and another family member owns the business that is located on that property. Very often the party that is operating the business is getting preferential rent treatment. Sometimes the rent might be delivered late, but more importantly, often the rent is below market rates.
This creates an imbalance – a business can then seem to be far more profitable on paper because one of its key operating costs is artificially kept low. Higher profitability leads to a higher valuation and higher listing price. But in this case, the profitability is simply inaccurate. If the party that holds the real estate is perfectly happy to accept below market rates (we’ve seen as low as 50% of market value – sometimes more) for whatever reason, they aren’t trying to harm the business – but it functions as a de facto rent control. By not forcing the business to compete in market conditions, it has given it an artificial environment to thrive. While this may work out for both parties, sometimes for decades, it often dooms the business when it comes time to sell, for two reasons.
Again, as mentioned above, the value of the business will have to be adjusted to take into account actual market pricing. This is the only way to discover whether the business can actually be run once that’s taken into account, or if the business is even profitable.
Inability to Resell
Part of the reason any buyer buys a business is because he/she too wants to, in time, sell on as well. A business that has this sort of risk attached – what happens if there’s a conflict with your landlord? Everything could be at risk – is less attractive to buy and even more difficult to resell once you are one owner removed from the original arrangement. Sure, perhaps the party that has the real estate is happy to keep taking checks from you, but perhaps the reason they were okay with the lower rent was because the other party was family…and you’re not.
In cases like these, when we do a recalculation and see that there’s not enough meat on the bone to entice a buyer, we encourage a managed liquidation of the business. This allows the party to at least cash out those assets that can be sold, and also frees up the party holding the real estate to either rent at market rates or to sell the real estate and perhaps get into the same arrangement with the business operating party somewhere else or into a new business/real estate holding entirely. Whatever happens, we’ve done our role as brokers, which is not always to sell businesses – sometimes our job involves telling someone the hard truth that they can’t sell a business. While that’s never easy, it does ensure we’re always doing right by every party to our transactions.
Want to know if your business can pass muster to be listed? Give us a call today!