When the Most Lucrative Option Might Be to Close a Business

Jul 30, 2019

I recently had a meeting with a potential client to present a professional market opinion of the values of a retail business and the real estate his family owned which was occupied by the company.   The business and real estate have been owned by the family for generations.  A lot of family pride exists related to the business. The company has a wonderful corporate culture with long term employees and is valued by the community.   The decision to potentially sell the business has taken years.  I have personally valued the business multiple times.  It is worth hundreds of thousands of dollars more today than the last time I valued it.   Revenues and profitability continue to increase and there are no “storm clouds” on the horizon that have the potential to negatively impact the business model.  Sounds like a business that would resonate with the marketplace and sell at a premium, correct?  Wrong, in all probability this business will never be sold and it is likely in ownership’s best interest not to sell the business.

Situations like the one described above are not common at IBA, the oldest business brokerage firm in the Pacific Northwest, for that reason I believe it provides an excellent opportunity to educate.

So, why shouldn’t this business and real estate be brought to market and sold or the business sold and the real estate leased and retained as an investment? The answer can be found in the specifics of the professional valuation done by IBA of the business and real estate.

In this specific scenario, the retail business is worth approximately $800,000 including the inventory at wholesale cost.   Revenues of the business are just under $3,000,000 per year with ownership taking home approximately 10% annually in salary & profits.  The business is paying $6,000 per month in rent plus triple net expenses.  The rent amount of $72,000 plus NNN per year creates the problem.

The rent amount being paid is satisfactory to the family members that own the real estate and has been maintained to facilitate a comfortable life for the individual running the business for the family.  Unfortunately, the rent amount is substantially below what could be generated from an alternative tenant in the marketplace, estimated to be $250,000 per year plus triple net expenses, if the property generated a “fair market return” on its value ($3,000,000+) in the real estate market.

It is not in the best interest of the family to offer the current rent rate to a purchaser of the business.  If the rent rate is brought to market value, the value of the business will be substantially reduced and the probability of business sale diminished due to the high rent rate as a percentage of revenues and significantly lower cash flow to ownership.   Offering a lease at any value to a purchaser of the business also has the issues of potentially diminishing the value & attraction of the real estate if it is sold and/or tying ownership’s hands for ten years or more, to satisfy buyer security (Note: Business buyers traditionally do not want to buy businesses that they will not be able to sell in the future.  One motivation for entrepreneurship is that unlike a job, a business can be sold for an equity creating event in the future.) and SBA loan requirements.

Recognizing, that “father time’ does not stop for anyone and that the family member currently running the company wants to retire and no successors for executive leadership exist in the family, what is the most lucrative path forward for the family? The answer in this situation is to close the business with a managed liquidation and sell the real estate to a developer buyer willing to pay in excess of $3,000,000 for the property.   It is estimated that the family can generate profit exceeding the likely goodwill value of the business in this scenario and maximize the value of the real estate in the marketplace.  This advice was provided by IBA to the business owner. I believe it is advice that will be followed in the next couple of years.  IBA received no compensation for the time, energy, or resources spent evaluating the business & real estate or providing sage guidance to the entrepreneur.

This business practice provides a wonderful illustration of one of the characteristics that makes IBA an unique service provider in the Pacific Northwest.  IBA, as a forty-five year old mergers & acquisitions intermediary company, has a corporate culture that emphasizes service & value for our customers.   As a firm, we welcome the opportunity to share our knowledge & experience with business owners considering the sale of their businesses. We do this in seminars, providing content to publications, having conversations on the telephone, and meeting in person with entrepreneurs.    We are generally willing to meet with any entrepreneur interested in learning about the process involved with selling a privately held company or family owned business and the services offered by IBA to our customers.   We are selective regarding the projects we engage on as a firm. Not every business owner or privately held company is a good fit for us as a representation project.  If we elect to represent a business for sale, we do it in anticipation of completing the project.  This is necessary because we operate with a business model where we are only paid by our clients upon completion of the transaction at the same time they receive the proceeds from the sale.   It is our belief that only the “best of the best” in business sales have the confidence and ability to operate with this business model.  IBA has been employing this business model for 45 years successfully facilitating over 4000 transactions in the Pacific Northwest.  We are not aware of a firm in the region that has sold half that many companies since their inception.

Honest advice from a knowledgeable, experienced professional is a valuable commodity.   Sage counsel without consideration for personal compensation is rare.  The professionals at IBA only want to be paid by happy clients who are satisfied with what we achieved as intermediaries.  Sometimes, our guidance will be not to sell a business like in the scenario described.   If that is the correct guidance, we want to provide it as a trusted member of the business community.   If you are interested in assessing the marketplace for a privately held company or family business in the Washington, Oregon, or Alaska we would welcome the opportunity to learn about your business and provide an overview of our client services.

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, and real estate communities on subjects relevant to the purchase & sale of privately held companies and family owned businesses.  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.