It is not common for any buyer to purchase underperforming businesses. Yet, there are times where businesses underperform and still attract the attention of buyers. How? Get financial information about the business, and use the old numbers for business valuation. Will this lead both the parties anywhere close to a “fair” valuation?
A buyer would always look at the current scores. On the contrary, a seller may present historical data on the table, and may even perform the growth projection based on the historical data which, technically, isn’t the right thing to do.
Purchasing an underperforming business
Now, if you’re a seller, you may be quite emotional about your business. You may indeed have a good feel for the value of your business and its potential for growth. You are emotionally attached to your business upon which you base its valuation, which isn’t the case with the seller always. The seller may not care for the emotional values of a business and cozy to the idea of purchasing it based solely on emotional values.
Next, as a buyer, you, must understand that “fair” actually is an ambiguous word. It’s safe to consider that “fair” will be whatever the seller and buyer finally agree on the negotiation part. If the buyer is not comfortable with the numbers presented by the seller, he or she may, of course, have the right to pass and move on. Supposing if the buyer can build a case that two years ago the business was doing $200K, and over the last two years it has an average of $80K, it is common-sense to assume that this may be the trend that will continue for another two years, if not more. The seller may tell the buyer that revenue has slumped, but may claim that it would rebound with potential buyers.
There is a way that the buyer can address the issue by including a future performance clause in the buying contract. The buyer(s) may go for the higher price, as demanded by the seller, but a certain amount of the buying price is to be returned if business does not rebound, as claimed by the seller(s) earlier. Similarly, the seller(s) may agree to accept the lower price, providing the buyer(s) would pay an additional amount when the business reaches the intended growth level or its previous state of business.
Both the buyer and seller should work on reaching a win-win situation here, and a carelessly worded contract that does not promise trust, commitment or genuine effort on the buyer’s part can only add to the existing state of doubt and fear.