Am I Paying a Fair Price?
In ANY negotiation or sales transaction it is only natural for the buyer to wonder if they are paying a fair price for the value they are going to receive. Not only is this fear common, it is often warranted. When you are an incoming immigrant investor and are not familiar with the parties at play, it can be more intimidating and unfortunately the fear may be even more warranted.
The vast majority of business owners selling their enterprise are not consciously trying to be dishonest or false in the representation of their business but …value is subjective.
For example, a business owner who founded his business, inherited it, or simply has worked in it for a long period of time may interpret the value of that enterprise to be greater than it will be when owned by the next owner(s).
Example: Bob owns Bob’s Country Store (BCS). Not only has he operated BCS for 25 years, he inherited it from his father, Bob Sr., who ran BCS for 25 years before him. Bob is getting older and his children are not interested in taking over BCS so he has decided to sell his family business to a new generation of owners. He has calculated the price of his business using responsible methods based on actual revenues, profit margins and accurate financial statements. Bob believes that BCS is honestly worth $100,000.
However, what Bob does not realize is that much of the performance of BCS comes from relationships built over 50 years. Without Bob, the business may not be as competitive when considering his prices, location or selection of goods. While Bob is being very honest and responsible in determining a price of $100,000, a buyer could just as honestly determine that the business should only be worth $75,000 based on an expectation of reduced performance without Bob and 50 years of relationships built.
Neither the buyer or Bob are incorrect or negotiating in bad faith. Without the ability to know the future the value of an operating business is subjective and always up for debate unless simply a sale of hard assets.
INCREASED CHALLENGE FOR NEWCOMERS
Everything described in Bob’s point of view is true in various degrees during the sale of any business to any seller but imagine if you are a newcomer to the region, the regulations, the language and the customs. The most savvy entrepreneur can have a hard time determining true value, realistic forecasts and other less tangible factors when they have limited experience in the region.
As an immigrant it can be very complicated to buy a business in a different culture from what you are used to. It is hard to picture all of the future influences on the value of the enterprise. Often the discussion ends up centering mostly on the numbers and that may not tell the whole story.
AN “IMMIGRANT PRICE”
Negotiating true value and price is a sensitive but natural part of any business sale. While it is more difficult for an immigrant in many cases, it is still not an example of anyone trying to cheat others or operate in bad faith.
However, there are examples where some few business owners act in bad faith and can damage the good reputation of the majority. Even if these business owners offer accurate financials they could mis-represent the “Goodwill” or less tangible aspects of the business to those that come from afar in the hope that they will not know better.
There can also be an unfortunate case that a local business owner simply believes that an incoming immigrant investor has more liquid capital and therefore can afford a higher amount so they inflate the price through various methods.
Example: If Bob was dishonest and heard that an immigrant investor from an affluent background was looking at buying his business he could portray his business to be worth $200k by choosing an inflated formula for valuation, misrepresent the value of his goodwill, or simply by just offering a higher price without explanation. The investor would not know of his dishonesty without more comprehensive due diligence.
Many local business owners fear this activity as much as the incoming investor that could be targeted. These actions can damage our reputation as a community and future relationships with new neighbors, customers and peer business owners.
For all sides of this issue, the main solution is to ask more questions.
As an immigrant it is very important to meet other members of the business community and ask lots of questions. Most business owners are very interested in helping newcomers build a life in their community and will be very open with honest advice and feedback.
Other suggestions include:
- Join the local Chamber of Commerce (and Participate). Make friends, learn more about the community and build a network of peers that you can reach out to when you have questions. Learn more about our local Chamber HERE
- Learn about the Business Culture from an unbiased source. Most communities have courses or groups you can join to better learn about the local culture, business practises and much more. In our community we are lucky to have the New Brunswick Business Immigrant Association (NBBIA) and other great programs such as the Business Immigrant Mentorship Program (BIMP) and the Hive Incubator Program in the Fredericton Immigrant Business Centre.
- Ask Questions at EVERY stage. Ask specific questions about price, real value and future expectations to your lawyer, accountant AND other stakeholders in your industry. Try to talk to future suppliers, customers and even competitors to get a more transparent image of your future business. You can start in Fredericton with any of our valued Partners.
- Connect with your local Immigrant Business Owners. Most communities have great groups or organizations where you can connect with newcomers from all regions of the world. At the very least you should be able to connect with a few immigrant owned businesses and ask some very important questions about their experiences. No one wants others to make the same mistakes as they did if they can help it.
As a member of the local business community I also think that it is important for us to reach out to newcomers at chamber events, to answer questions honestly when asked and to support new business owners as they arrive so that they become productive, valuable members of our community. The future long term value of immigration and especially of new business owners in our community is very obvious and we can only benefit from making sure that we build the best foundations for future growth as possible
Have you ever experienced something like this? Please send us any stories or experiences that we can pass on to future newcomers and business owners alike.
Succession Specialist at the Fredericton Immigrant Business Centre