February 2020 | Przegląd Piekarski i Cukierniczy (Baking and Confectionery Review)
SELLING THE COMPANY
Selling their own bakery is something that entrepreneurs have usually never done before. They try to translate their rich professional experience into a new, unknown situation. In the best of faith they prepare the plant for sale, put a price on it and… after some time… suffer a spectacular failure.
Today, in great brevity, we will get to know the eight most frequent mistakes made when selling one’s own enterprise.
W-MOSZCZYNSKI ppic 2-20Tax optimisation
Entrepreneurs often boast of their ability to avoid paying taxes. In the short term they preventively make purchases of raw materials, e.g. flour, and make use of expensive services in order to create additional costs. They often buy unnecessary fixed assets so as to pay lower taxes in the following months by increasing depreciation. Tax optimisation reduces the level of cash at the end of the Cash Flow statement. A fall in profitability leads to a reduction in the level of taxes paid. Unfortunately, it also leads to a lowering of the company’s market value. Investors buying a bakery of course know and understand the methods of tax optimisation. Despite this, such activity discourages them from buying.
The owner’s salary at the minimum level
Investors usually react negatively when they see that the owner is economising on their own salary or on the salaries of key employees. Investors are interested in maximising the rate of return on investment (ROI), not the rate of return on labour (ROL). A low level of remuneration of the bakery owner is a further negative stimulus badly affecting the price of the bakery being sold.
Concentration of sales
The owners of bakeries or confectioners’ shops often regard as their success the reduction of the costs and labour-intensiveness of sales by concentrating them on a few key customers, or by limiting sales to their own network of retail shops. Such a measure has a negative influence on the company’s market value. Investors like it when the company they are buying has diversified sales. A large share of sales concentrated in one area will always be identified as a threat.
The family character of the company
Bakery owners often regard family companies as something better, unconstrained by procedures and unnecessary bureaucracy. Cars and computers which are in the bakery’s register of fixed assets are often used by persons not employed in the confectioner’s shop. Private loans from the company till, free shopping in the company shops. All of this jars on investors, who lower the funds which they are willing to pay for the bakery or confectioner’s shop.
Spreading information about the sale of the bakery
Information about the intention to sell a bakery or confectioner’s shop introduces uncertainty among the staff, the customers and the contractors. This often leads to the departure of some key employees or customers. Such information may also provoke aggressive actions by competitors. Investors, too, are sensitive to the revealing of secrets. Their irritation and disappointment with the owner’s behaviour may lead to a breaking off of the talks.
The absence of working capital loans
According to entrepreneurs, proof of the good financial condition of their bakery is the absence of working capital loans. For investors the absence of external sources of financing is a negative signal. Either the company for some reason does not have creditworthiness, or its owner has no idea about the cost of capital and the use of financial leverage.
Overestimating the value
Entrepreneurs often approach the sale of a company like the sale of a house or a car. They determine the price on the basis of the sale price of other, similar companies. To the price obtained they add on average 20% „for haggling”. Such rules function when selling a car; applying them when selling a company usually ends in disaster. The price of a company is determined in a more sophisticated way, and in negotiations the price usually undergoes only a slight correction of 6–13%. A bakery should be valued by someone specialising in trading in companies.
The absence of an alternative in negotiations
Too high a price deters other entrepreneurs from the trade and attracts speculative funds, which easily beat down the price originally asked. The reason is the absence of an alternative for the bakery owner. It is comfortable when many investors approach the person selling the bakery. It is also good when the owner has several alternatives obtained as a result of analyses. Meanwhile, most often during negotiations with funds the owners are defenceless: they have no alternative, they have no way out, they do not even know how much their company is really worth. They remain alone with their emotions and they lose.
Selling a production enterprise is not selling a house; running a business is not building a company’s value. There are, admittedly, common features; however, adapting one’s experience to a process in which the entrepreneur has never before taken part may lead to a spectacular failure. Let us therefore remember what not to do when selling our own company.
Wojciech Moszczyński
Wojciech Moszczyński — graduate of the Department of Econometrics and Statistics of Nicolaus Copernicus University in Toruń; specialist in econometrics, finance, data science, and management accounting. He specializes in the optimization of production and logistics processes. He conducts research in the area of the development and application of artificial intelligence. For years he has been engaged in the popularization of machine learning and data science in business environments.
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