Why Your $2M Family Business Is Actually Worth $825K

View in Browser

⏱️ Read time: 4 minutes

🔍 Deals analyzed: 1 (+ The Family Discount Formula)

💣 You'll learn:

• Why free family labor is anything but free

• What buyers really think when they see your family business

• How to turn a messy family deal into diamonds

🥃 THE REAL DEAL

Six Shooter Springs

Walking into my second month of business brokering, I'm heading to a liquor store with a colleague. The scene at Whistlin' Whiskey Warehouse tells a story most sellers don't want to hear…a business completely dependent on family. Or maybe you do want to hear that because you’re the type of person who wants a “family business.”

Whiskey William himself greets us behind the liquor store, unloading a truck while leaning on a crutch supporting his injured leg, rolling off a recent heart attack.

"Never mind what family says. I run day to day, otherwise nobody would really do anything. My wife keeps track of the books," Mr. William tells us, pointing to an office with a computer older than himself.

Between his health issues, complete operational dependency, outdated systems, and family-run financials, we're looking at classic value killing traits that buyers fear most.

🔍 DEAL DETECTIVE

The Family Discount Formula

Let's talk about SDE (Seller's Discretionary Earnings) first. This is your true cash flow: net profit plus owner salary, personal expenses, interest, and one-time costs. It's the number that drives your business value, typically multiplied by 2-4x in small business sales.

True Business Value =

(Reported SDE - (F + T + R)) × Multiple

Where:

F = Family Labor Gap (Market rate salaries - Current family compensation)

T = Technology & Systems Gap (Cost to modernize operations/systems)

R = Risk Factor (3-6 months of additional working capital for transition)

Let's run the numbers on Six Shooter Springs:

Reported SDE: $750K × 3 multiple = $2.25M asking price

But buyers see it differently:

F = $225K (3 family members at $75K market rate)

T = $100K (New POS, accounting systems, documented processes)

R = $150K (3 months working capital for transition)

True SDE in Buyer's Mind = $275K × 3 = $825K value

That's a $1.425M gap between seller expectations and buyer reality.

💎 VALUE VAULT

Getting Real About Value

—> For sellers, this doesn't mean you'll close at the lower value. But understanding this buyer psychology is crucial for making informed exit decisions. If there's a gap between your retirement goals and likely buyer offers, you can either go to market now and adjust expectations or invest 2-3 years in professionalizing your operation.

—> For buyers, don't walk away from family businesses immediately. These situations often present hidden opportunities. Consider keeping key family members during transition, structure earnouts or contingent seller notes tied to successful knowledge transfer, and build transition costs into your initial offer rather than discovering them later. The best deals happen when both sides understand and openly address these realities.

Stay rebellious,

kinza

p.s. Quick tip for sellers considering exit…the hits to cash flow from replacing family members are only going to pay dividends later. Start now.

Was this valuable? Rate this issue.

Copyright (C) Want to change how you receive these emails?

You can unsubscribe