Sell a Business That’s Losing Money
Can you sell a business that’s losing money? You bet you can!
When I speak with groups of small business owners about selling, they express disbelief that a business that is losing money can be sold. Even owners of Middle Market businesses, generally more astute business-wise, question me when I tell them that selling a business that’s losing money is not as challenging as they may think.
Though selling a money-losing business is “expert advice” territory – specifically, gathering the right team – if your business has been losing money or just barely profitable, getting such talent on board will greatly help in realizing the business’ hidden value and increasing the likelihood of a sale.
There’s value in most businesses – even those losing money. Aside from the business’ assets, there are also various types of hidden value. This post discusses several of those.
Always remember that an experienced professional business broker can advise on the best way to market and sell your business. And, as I’ve preached relentlessly, maximizing the value of your business takes preparation – several years is ideal – years in advance, to prepare your business and maximize its selling price.
Hidden Value #1 – The Financials
Because privately owned companies tend to keep reported profits – and thus taxes – as low as possible, financial recasting is an important element to understanding the earning capacity of a business. For example, many owners use every tax loophole and accounting measure to maximize what they claim as expenses and minimize what they report as taxable income. Recasting the financials allows the professional business broker to determine what the business really made.
Some advisors, unfamiliar with the methods of business valuation, advise business owners to forego such tax-avoidance measures and show the maximum profit possible on financial statements and tax returns. But experienced brokers and advisors can show what the true earning power of the business is even while the owner is taking advantage of all possible tax avoidance possibilities. These advisors do this through a process known as “financial recasting”.
Financial recasting adds back depreciation and amortization because these are non-cash expenses; that is, the company does not write a check for depreciation. The interest expense is also added back as it is a result of the current owners’ financial decisions. The result is Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) which must be further adjusted to eliminate such items as excessive and discretionary expenses, owner’s salary and nonrecurring expenses from the historical financial presentation. Such financial recasting results in a truer representation of the owners’ benefits and is referred to as Discretionary Earnings (DE). It represents the true earning capacity of the business; the “owners’ benefits”. In almost every instance, this number will be higher than the bottom line on either P&L or tax return and it is where most valuations of small and mid-sized businesses start.
If your business is losing money, have a professional business broker perform a financial recasting as Step 1.
Hidden Value #2 – The Intangibles
Even after performing a financial recasting, some businesses may still be showing a loss – or be barely profitable. It is easy to believe that such a company is not worth trying to sell. But that could be wrong. What one owner considers worthless could have a value to someone else.
For example, if you have an eCommerce business – a small one selling on Amazon or eBay or a large one with your own eCommerce site – there is value, sometimes significant value, in a history of positive feedback, a customer list and an email list. These “assets” can be worth a lot of money. Even if the business made little or no money on sales — so little that there is little point in continuing selling the specific stock — it is the established feedback history and customer list that have value. A new business selling on Amazon would have to wait months to have a chance of winning the Buy Box. A new business selling through its own eCommerce site would have to spend many months and possibly years to build a reputation and an audience. Acquiring a company with an established history could put the acquiring company on the map immediatey.
Hidden value #3 – The Lease
If your business is just eking by but has a fantastic location, there may be value in the lease.
For example, if you have a restaurant that is losing money in a growing traffic corridor, there are certainly restaurant operators – perhaps those offering offering different types of cuisine – that would be interested in buying your business for the physical assets (furniture, fixtures and equipment, or FF&E) and the lease. This strategy requires that the lease be desirable – a condition that will be FAR more easily accomplished by planning ahead.
Hidden value #4 – The Losses
Sometimes even the most obscure things have value.
For example, we worked with a company some years ago that recorded significant losses over a period of several years. The owner contacted us in desperation; he was going to close his business and walk way. However, we pointed out that he could probably sell the business. As with most people, it never occurred to him that a company with ongoing losses or a negative net worth could be worth anything.
We pointed out that the company’s losses could be used to offset tax due on future profits – if not for him, for someone else. This meant that a competitor could buy the company and use the losses to offset its future tax obligations. Thus a company with, say, $100,000 in cumulative losses and no outstanding debts could be bought for, perhaps, $50,000. The acquiring company could save $100,000 on its tax bill straightaway – a two-for-one return on its investment.
Again, to capitalize on any of these strategies, an expert should be consulted. And finding the right buyer is crucial, a requirement that cries out for an experienced professional business broker/advisor. But it shows that value can be discovered in unexpected areas.
Many types of assets
Consider, too, the company’s physical assets and intellectual property. A domain name and website are assets with a value. Established eCommerce sites can be worth a lot of money if they have sufficient traffic. Then there is your customer list, including customers’ order history, contact info, physical mailing address, and email addresses. To a competitor, these could have value.
These are just a few ideas. Again, an expert can review your company’s unique circumstance and likely come up with other strategies.
If you have any questions, comments or feedback on this topic – or any topic related to business – I want to hear from you. Put them in the Comments box below. For example, if you’re considering selling your business, what is your biggest concern about the process? Are you wondering how to find out what it’s worth or how to find the right team? Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a profitable week!
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