Setting Business Owner Expectations

One of the most important parts of my business is setting

owner expectations.  For example, you

don’t want a business owner believing that we can sell the business in a month,

because although we may find a buyer quickly, the sales process takes many

months regardless of a buyer appearing immediately.

Valuation is the most important expectation.  I remember when I sold in 1997 the first

technology that I started.  My wife and I

had very little money since I used all of our savings starting the company, and

after I signed the purchase agreement we spent some hours making a prioritized

list of stuff we would buy or things we would do with the money.  They say money doesn’t buy happiness but I remember

that as a really fun time catching up on the spending.

The last thing I want to do is mislead a business owner, and

possibly cause them to start down that path of “spending” the money.  I try not to give estimates when on a first

visit, even when pressed.  I don’t ask

what the business owner wants.  I want to

go away, do the research, use my partner Fred Hall if needed since he does

formal business appraisals.  Then I

present my opinion of what the business value is.  We never ask for a representation agreement

until we present the valuation, and there is mutual agreement regarding

it.  Some broker/advisors will tell an

owner what they want to hear to get a listing, and I’m proud that we don’t play

that game.  Our opinion of value is what

it is.

However last week I blew it. 

I did an analysis using prior year’s tax returns and the year-to-date

profit and loss.  I noticed that the tax

returns were cash basis, and that this company was growing.   This usually means, as I wrote recently in a

blog post, that the earnings were higher than the financials would indicate.  We did the conversion from cash to accrual and

presented our results.  It turned out

this was right in line with what the owner thought the business was worth.  OK so far.

I asked the business owner if he could get updated P&Ls

as quickly as possible after the first of the year, and he replied he

could.  He also happened to mention in

his email that the P&Ls his accountant produces were accrual while his tax

returns were cash basis.  Oh oh.   I had made an error of assuming the P&Ls

were also cash basis, which meant I had added revenue that was already there,

and therefore had overshot the mark on valuation.  At least we caught it quickly.  I’ve witnessed errors like this caught during

due diligence after the business was on the market and a buyer made an offer to

buy.

I received the email from the business owner while walking

through

in San Francisco

on my family’s annual holiday getaway weekend. 

I felt sick.  I couldn’t let this

go over the weekend, so I called the client and gave him the news.  He was rightly disappointed, and said he

needed to rethink the sale and talk to his wife.  I certainly don’t blame him.  There are always a few bumps in the road in a

business sale, and hopefully this means there is one less bump on the road for

this owner.