Someone is sitting in the shade today because someone planted a tree a long time ago...

Warren Buffett

Recently,  Steve and I had the opportunity to meet with a husband and wife who were referred to us by a mutual friend. They live in the delightful region of South Texas known as “Hill Country” and have been providing plumbing services to their local community and the surrounding ranchers for the past twenty-five years. Both are in their mid-sixties and ready to relax.  At our request, about a week before getting together, they had provided us with their financial information for the previous three years.

      After a few minutes of “Hi, how are you… and do you know so and so?” we shifted gears a bit and asked them a series of questions about their business, starting with, “Why are you selling?”, and about six questions later, “What do you think your business is worth?” The last one is often the most challenging, both to the seller and the business broker.

      To put their reply into prospective, we have to look at their history and their expectations…

      They are a team, he’s a journeyman plumber who learned his trade driving some other guy’s truck and she manages the office, including scheduling, bookkeeping, purchasing, payroll… you get the picture. This couple are poster kids, the epitome of American entrepreneurship. At their peak, they had five employees in addition to themselves. Now, it was back to basics with just the two of them still active in the business. Their kids, incidentally, are not interested in chopping roots out of sewer lines or unclogging sinks.

      Talk about “sweat equity”, they told us about paydays when everyone got a paycheck but them and how the customer’s broken toilets were always fixed first. And how he did the oil changes on the trucks and rotated the tires to save money; on Sundays after church!  And she would often run out to MacDonald's to get lunch and drop it off at the job site to make sure the work was completed on time as promised.

      We listened—sometimes being a business broker is more about life-coaching than selling—because we sincerely want, as it says on our website, to help people make their lives better. But eventually it all comes down to numbers. Their expectation was a nice cash bonus for all their years of hard work and sacrifice. Unfortunately, their perception of the selling price was simply not realistic.

      To tweak a popular phrase, “Reality is what happens when you’re making other plans…” their reality was a business worth a bit less than half of what they expected. Not surprisingly, this is a pretty common misconception, especially for small family owned and operated businesses. Needless to say, they were not pleased with our initial opinion of the value of their plumbing business and the meeting broke up on a rather cool note. We did suggested however, that they consult another business broker for a second opinion, which they did.

      A week later they asked to meet again and we did, this time at a cool little place on the banks of Cibolo Creek in Boerne called, The Dodging Duck.

      They admitted that the other broker had come in with a number even lower than ours and had actually declined the opportunity to represent them in the sale of their business, siting the lack of “uniqueness” as the reason. “Plumbers and HVAC companies are ubiquitous,” he’d told them, adding that he was probably not the right fit for them; a polite way of saying he wasn’t interested.

      Despite their experience with the other broker more-or-less confirming our opinion of the value of their business, they continued to believe they should be compensated in some way for the their years of toil and sacrifice.

      After taking a break to dive into our meal, in my case an Axis Venison Cheese Burger, we revisited the discussion of the value of their business. Not only did I enjoy lunch, it also gave me an opportunity to think about how best to put their struggle with the value of their business into prospective.

      “Let’s think about the last twenty-five years from a different angle,” I proposed after the dishes had been cleared.

      “Instead of being owners, what if you both had been employees of a local plumbing company? Your jobs were identical to what you do now, but you got paid regularly, didn’t have to personally maintain the equipment and worked regular hours. When you did have to work late or on the weekends, you got paid overtime. And, you had paid vacations and health insurance.”

      I could see them exchange a sideways glance, as if read each other's mind and asking, ‘do you see where this guy is going?’

      “The point is,” I continued, “in this scenario, you’ve made pretty good money for twenty-five years. Had health insurance for you and your kids, possibly a vehicle provided, maybe an annual bonus in the later years. After many years of loyal service, decide to retire.

      “Would you ask your employer for an exit payment of, say, $150,000?” That happens to be the difference between what they think their business is worth and our Opinion-of-Value. They glanced at each other again, but said nothing.

      “I am not trying to be judgmental,” I added, “just realistic. Unless we find another plumbing company to purchase your business, the potential buyer will simply be buying a job. Granted, there will be an existing customer base and some well-used equipment, and we’ve factored that into our estimate. Which, incidentally, is why the other broker probably came in at a lower Opinion-of-Value. But, frankly, there are over a dozen plumbing companies within three miles of where we’re sitting, we’ve checked.”

      Our discussion more-or-less ended on that somewhat somber note despite our best efforts to offer encouragement with the fact that the $110,000 book-value of their business would make a decent addition to their modest investment portfolio.

      Not to mention the fact that they had wisely purchased the land and the building where the business is located, which gives them the option to sell the property separately or retain it and lease or rent it back to the buyer. The latter alternative would provide an on-going and passive income-stream for the foreseeable future.

      Their reality, despite their somewhat unrealistic perception of the value of their business, is actually very good. They have done reasonably well financially, made wise decisions and the last twenty-five years have been well spent, putting them in a position at this stage in their lives, that is arguably better than if they had elected not to own their own business.

To our knowledge, this business has not been sold.