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The Worst Time to Sell Your Business is When Your Profits are Down

Apr 4, 2008
Julie and Michael owned their music business for over 25 years. Like all businesses they have had their ups and downs but in general business was pretty good. They had no formal exit strategy but eventually planned to sell their business and retire.

Over the years their business had grown slowly but surely; an incremental growth that was fueled by hard work and careful reinvestment back into the business. All appeared to be going their way up until the past few years.

Sales unexpectedly began to go flat and many of their more expensive items were not selling. They still sold sheet music and guitar picks and the cheaper items; but drum sets and pianos were simply not moving.

Still, they were optimistic that things would improve. They still had good foot traffic in the store and the local schools kept sending music students to rent instruments. But more and more Julie and Michael could see their working capital was tied up in high ticket items that did not sell.

Finally one of their better customers did not purchase their youngest child's instrument from Julie and Michael. Frustrated and alarmed, Julie called the customer and asked what the problem was.

The customer replied there was no problem but his budget was especially strained with buying braces and a new car. He added that once he knew what instrument his kid needed he simply bought it on the Internet for about 20% less.

That 20% was part of the margin Julie and Michael were getting as the difference between wholesale and retail.

Julie and Michael were victims of the "look at it here but buy it cheaper on the Internet" syndrome. E-commerce technologies had opened up the distribution channels and e-commerce based companies were willing to sell the same products at less than standard retail; after all, these e-commerce companies didn't have the overhead of a large retail store.

Stunned and disappointed, Julie and Michael decided to sell their business before things got even worse. They put their business up for sale and were certain someone younger that loved music would buy their labor of love. In the first three months they had no serious inquiries so they lowered the price.

After six months they had an inquiry from a serious but astute buyer. The buyer examined their financials and stated the business had been in decline and needed a "miracle turnaround" to make it work. In the end the buyer offered them a third of what they were asking and then simply walked away.

Julie and Michael's problem was their original business model and business plan were now obsolete. Even a not so bright prospect could see that things had been going downhill and more of the same could be expected.

Since the business had little potential and was showing declining profits, no one was interested. Buyers are interested in what's in it for them, not the sweat equity that goes into building up a business.

In the end Julie and Michael did sell but certainly not on their terms. They ended up selling the equity in their inventory and not the business per se; sort of a liquidation fire sale. And needless to say at a lower price they had ever imagined.

Julie and Michael were dejected. They had spent the better part of their working lives building their "baby" business only to see their equity drained as profits declined.

In fact, they learned that for the past several years they had been paying themselves not from profits but from their already earned equity.

In hindsight, Julie and Michael learned they waited about three years too late to sell. But human nature being what it is they weren't interested in selling when times were good; they waited until they became somewhat desperate.

The lesson Julie and Michael learned too late was sell while the business valuation is at its highest.
About the Author
Jack Deal is the owner of JD Deal Business Consulting, Monterey and Santa Cruz, CA. Related articles may be found at http://www.jddeal.com/blog/strategy http://www.freeandinquiringmind.typepad.com
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