As a business broker in Florida, I constantly encounter entrepreneurs who want to sell their companies at a premium, basing this value essentially on the “potential” that their business has. In these cases, it is common to find deficient or non-existent accounting records.
Placing a business on the market under these circumstances presents serious drawbacks for both the seller and the intermediary of the operation, since any rational buyer will demand solid evidence to support the effectiveness of the business.
And the ""potential"" of a business cannot be directly incorporated into its sales price for several reasons:
- “Potential” is something intangible, subjective and unverifiable. It lacks real quantifiable value to support a valuation.
- It depends on certain projections and future business plans being met, which always involve uncertainty. There is no guarantee that the projected “potential” will be realized.
- Buyers are looking to pay for concrete facts and demonstrable results, not for promises about future possibilities, because they want to minimize risk.
- The “potential” does not provide information about the actual ability to run and manage the business by its current owners. Incidentally, a new buyer may never materialize it.
- Lenders that finance the purchase of a business rely on hard data on current performance, not future potential.
- Including “potential” in the price usually leads to overvaluing the business, and the buyer will expect this valuation to translate into concrete results.
- To pay more for “potential,” the buyer will require a business plan and solid financial projections to support the investment.
In summary, the “potential” can be used to negotiate better sales conditions, but not to artificially inflate the sales price of the business, since during the Due Diligence the truth will come out.
In the intricate world of business selling, it is essential to remember that “potential” does not always translate into palpable reality. As Peter Drucker, the renowned business management expert, put it, “the best way to predict the future is to create it.”
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Author: Alfredo Gonzalez (alfredo@negociosenflorida.com)
Illustration: Bing Images.