With the recession continuing to bite, you almost have to stay away from the business pages, because every other day there is a ‘poll’ that says business confidence has plummeted and the new coin of phrase is ‘double dip recession’. But business still carries on.

One interesting wrinkle that raises its head for Paul and I as business brokers in these tough times is the owner’s personal debt situations influencing their expectations on the value of their business.

Or as has recently happened in a small transaction we have been involved in, where the proceeds of the sale, and the payment terms that have been agreed upon do not give the owners the funds required to fully repay their debt to their financiers and thereby they are unable to release the charges on the business and therefore cannot settle.

Their personal situation becomes the fore front of their minds and even though they have an unconditional deal, which they have also signed as covenantors, they have tried to bully the purchaser into changing the terms of the contract to suit their personal situation, so they can settle. If they had been a little more honest and forthright about their personal situation we would have negotiated more suitable terms on their behalf with the purchaser initially, but instead after following their secret squirrel approach they tried to modify terms the day before settlement. This is hugely unsettling to the purchaser because he wonders where he stands trusting the owner to properly transition the business. Lawyers then start to dig their toes in on both sides and we sit at our desks twiddling our thumbs waiting for the dust to settle. All because our clients failed to separate their personal situation from their business.

We have also this week been helping a purchaser look through another deal, which we are not selling. A significant business, but it also is a business with significant debt. The owner’s accountant has been attempting to help him sell down 50% of the company to be able to repay $1.4m debt to the bank.

So the accountant comes up with a valuation based on a $600k EBIT of $3m which conveniently would offer the owner the ability to sell 50% and clear his debt. Just on the top-line of this valuation it is fantasy and if the same accountant was working for the purchaser he/she would value to business at most at around $1.8m. The cynic in me says this is a good way for the accountant to get his/her fee by telling the client what he wants to hear.

As I have mentioned in previous posts a business value is generally based on a capitalisation rate/multiplier on what the sustainable earnings of the business are. The setting of the capitalisation rate/multiplier is based on the risks to that income, not what the owner wants or needs!

These situations often come up because business owners strip too much money from the business when things are going well and have to borrow to cover the shortfall when things start to fall off. Also when times are good lenders are often in business owners ears encouraging them to take on more debt and these loans often are for discretionary purchases. The hens come home to roost when times get tough and there isn’t enough working capital in the business to operate day to day.

Any business is worth what it is worth based on the sustainability of its income not what the owner wants or needs from the transaction.