“Wait, you are saying you can’t sell my business even though I consistently make $1 million a year? I don’t know how you do things in Tennessee, but here in Florida, I think my business would be considered quite sellable.”
Brian (not his real name) is a third-generation orange grove owner. His family has owned hundreds of acres of productive groveland in south Florida since before World War II. The orange business has changed quite a bit over those decades, but the family is still making a nice living growing and selling oranges.
Brian has a business he wants to sell. I was visiting with him over the holidays while in Florida visiting my wife’s family. Since I am not licensed in the state of Florida, I knew I wouldn’t be able to broker the deal for Brian. But, I was happy to meet with him at the request of a mutual friend to give Brian advice on how to think about the sale of his business.
Brian wants to keep the orange grove business and real estate, but he wants to sell a related business: buying distressed fruit and selling it in overseas markets. (Something I didn’t know: orange juice production in other countries has lower quality standards.) Anyway, having grown up in the orange business, Brian has a unique knack for identifying and pricing substandard fruit. He has relationships with seven grove owners throughout the state from whom he can buy substandard fruit.
He has a nice business model, buying the fruit for about one-third of the price he knows he can sell it for. He has a staff of nine who help him organize the buying process and coordinate with overseas’ buyers to manage shipments. Over the past six years, his annual revenue averaged about $10 million and annual EBITDA about $1 million.
Brian was not happy about my valuation estimate.
He explained his obvious frustration, “I have a friend in private equity who told me they buy businesses for 6 to 8 times EBITDA, so why isn’t my business worth $6 to $8 million?”
I wasn’t sure Brian was into fine art, but I used an analogy I thought he’d understand. I said, “Let’s take the 19th-century Dutch artist, Vincent van Gogh. Assume he could sell his paintings for $1 million each and he could produce three or four paintings a year.”
I knew I had Brian’s interest as he said, “You know, van Gogh was crazy, his paintings weren’t valuable until after his death, but I’m following your story, go on.” So I continued, “In my analogy van Gogh has revenue of $3 or $4 million per year, but that doesn’t mean he could sell his painting business. Though he has support people around him, the work of generating revenue is all on van Gogh. Only he has the style, talent, and know how to take a raw canvas and turn it into something worth $1 million.”
At this point, I turned the conversation back to Brian’s business. “I see you as the van Gogh of the distressed fruit business. You have the knowledge, talent, and years of experience to identify and price substandard fruit. Maybe with years of apprenticeship, you could train someone to do what you do. But the skill is so unique to you, no one would be able to buy the business and assume the revenue would still be there when you’re gone.”
“So I have to keep buying oranges until I shoot myself,” Brian said with a chuckle, apparently knowing the sad end of van Gogh’s life.
“I hope this isn’t how it turns out,” I said to Brian, “but the implication is obvious. Yes, you own the business, but since you are the business, it’s just not sellable.”
Brian understood my reasoning. We talked through potential scenarios ranging from bringing in someone with a plan to train them over several years to take over the business, to winding down the business within a year or two. Brian is making good money in the family’s basic business of orange production so his livelihood isn’t at stake. He is a smart and honorable guy who just wants to do the right thing for his family and their employees. The painful lesson from our three-hour lunch has a lifetime of value for every business owner. If the business is overly dependent on you, you will take a huge hit when trying to sell it. Don’t be Brian, don’t be the van Gogh of your business.
JIM CUMBEE is President of Tennessee Valley Group, Inc. a retainer-based business brokerage and transition mediation firm in Franklin, Tennessee. Cumbee is an attorney and has an MBA from Harvard Business School. Jim is the author of Home Run, A Pro’s Guide to Selling a Business. https://www.amazon.com/Home-Pros-Guide-Selling-Business/dp/1599329239 . He has a wide range of corporate and entrepreneurial experiences that make him one of the most sought-after business transition advisors in the state of Tennessee. The story above is true, but the names and fact patterns above have been changed to preserve the parties’ identities.