Sales of unprofitable businesses are common in some industries. Even in other industries, Corporate Consultants can help you prepare your money-losing business for sale to increase the level of buyer interest.
Businesses in certain industries sell at prices that reflect sales revenues more than profits. For example, if you sell an alarm service firm to a bigger company in the same industry, the acquirer knows how much your revenues will produce in profits based on their own business model and economies of scale. This will determine the multiple of revenues they’re willing to pay, and they offer approximately the same multiple to any seller.
Companies that buy up numerous businesses in the same industry are called “consolidators.” Besides alarm companies, other examples of industries where this occurs are telecom services, pest control, real estate brokerage, property management, insurance agencies, medical billing and waste collection.
If you are not fortunate enough to be in an industry targeted by consolidators, there are still steps we can take to increase buyer interest in your firm. First, the financial statements, tax returns or both should be up to date. You may be losing money, but the buyer will want to know the magnitude of the loss, the size of the revenue stream they’re buying, and whether the revenue trend is up or down.
Corporate Consultants will prepare a schedule of adjustments to the income statements – usually covering the last three years – adding back items like owner salary, owner benefits, depreciation, interest expense and one-time expenses. We will communicate to the buyer that a substantial part of the firm’s reported loss may consist of discretionary items like your salary and your car lease.
When you’re unprofitable, the buyer may view the transaction as the purchase of the specific assets of the business rather than a cash-flow stream. Therefore, it is particularly important to prepare an accurate list of furniture, fixtures and equipment (FF&E) that are included in the sale. Also, you should know the value of your product inventory and have a quick and accurate way of updating it.
Your customer list is likely to be a key element of the sale. A buyer will pay more if the list is automated, either in an accounting program like QuickBooks or a database like Access. You don’t need to disclose customer names to the buyer, but be prepared to show him a sample customer record, so that he knows the information is easily transferable and of use to him.
Corporate Consultants will also document other intangible assets that may be valuable. For instance, you may have an exclusive territory agreement with a sought-after distributor. If so, we will need to know the conditions under which the agreement is transferable.
You may need to consider seller financing. Generally speaking, a buyer can’t get bank financing to purchase an unprofitable business. You’re the only possible source of financing. Remember that a seller note is usually secured by both the assets of the business and the buyer’s personal guaranty. You have the right to request both a personal financial statement and a credit report from the buyer before making a decision about this, so you can make sure you’re dealing with a reasonably strong buyer.