Purchasing an Underperforming Business

by Angelo Meneguzzi

Consider this scenario. A wife and husband are in the starting stages of negotiating a price for a florist shop that is being sold by an elderly lady who is selling, “because her children want her to retire.”

Since her husband died five years ago, the business has been going downhill, and for the past three years it has been “underperforming.” However, as they try to get financial information about the current business health, she is pushing to use the numbers that are over three years old to value the business. Is this a recipe for a fair valuation?

First, remember, it is her business and if she and her late husband ran the business for many years, she may indeed have a good feel for the value of the business and its potential for growth. Conversely, her valuation may be heavily weighted by her memories and emotional attachment to the business. This ‘value’ is very real to her, though maybe not to a potential buyer.

Next, be aware that “fair” really is an ambiguous word. Consider that “fair” will be whatever all parties finally agree on at the end of negotiations.

If the buyer does not like the number that the seller is asking, they have the right to pass.

If the buyer can build a case that three years ago the business was doing $100K and over the last three years it has averaged $60K, they can point out that this is a trend that may likely continue.

The seller may say that for reason-1 and circumstance-2 revenue has slumped but it would bounce back with the potential buyers (younger, energetic, enthusiastic) at the helm.

One way to address both these issues would be to put a future performance clause in the purchase contract–

  • the buyers pay the higher price but if the business does NOT come back, a certain amount of the purchase price is returned, or
  • the seller accepts the lower price and the buyers agree to pay an additional amount when the business growth passes a predetermined amount or attains its previous level of business.

You can work a win-win purchase here with a carefully worded contract, some trust by both parties, and the desire, commitment and genuine effort on the buyers’ part to succeed.

About Angelo Meneguzzi

Angelo Meneguzzi has over 12 years of high-tech marketing, public relations, product development, and sales experience including several technology start-ups. He has offered strategic counsel to leading Internet brands, and has consulted with industry leaders on branding, marketing, and business development. Mr. Meneguzzi is currently working with Internet start-ups in product development, marketing, and strategic corporate development. He has consulted for Infoseek/GO/Disney within the Small Business Center, and has coordinated online activities with groups such as Hummer Winblad, Upside Magazine, and ABC News. As PR Manager of FWB/StreamLogic, Mr. Meneguzzi used his extensive marketing, technology, media, and networking know-how to identify and leverage worldwide opportunities worth millions of dollars in product and company exposure, resulting in dramatically increasing global brand awareness and sales. Mr. Meneguzzi also worked as a PR manager with Neale-May and Partners, Lois Paul and Partners, and Alexander Ogilvy Worldwide PR. Mr. Meneguzzi an export company Mr. Meneguzzi earned a BS from San Francisco State University in Business Administration/Marketing.

  • http://www.buyinga-business.com Christine Sutherland

    I would add a cautionary word about contingency contracts that seek to protect the buyer or seller against over or under valuation. When the crunch comes, it may be that neither party has capacity to pay and the process of litigation could cost more than the amount sought in compensation.

    I would not purchase a business on these terms unless that purchase was part of a wider strategy and I could take the hit of a potential loss.

    Once a business begins to slide it can be extremely difficult to win people back, or to find new customers within the framework of negative preconceptions in the market.

    It may seem harsh, but my policy is not to touch a business which is over-valued for current performance. I also recommend assessing any income projections in the context of altered economic and technological environments. You don’t need to guess these things because you can examine whole industries historically through times of past recession. You can also look at current research or studies by peak bodies or within academia to predict future trends.

  • Hill & Block Capital Partners

    Normally we advise our clients to avoid those “performance based payments”. In reality, very few will be able and at worst WILLING to honor those “perfomance based” obligations say 2 to 3 years down the line. When you acquire an underperforming business, you do so with eyes wide open. Business people are either rewarded (through profit) for calculated risk taking or be punished for risk taking (through losses).

    In practice, as a business person, the agreed purchase price is the first junction of either profit or loss.

    Its true for both the seller and the purchaser.

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