Potential — One of the Most Harmful Words in Business Sales
Potential – One of the Most Harmful Words in Business Sales
Without question, it’s one of the most misused and abused words in business sales and commercial real estate. There are few among us who haven’t been completely annoyed by proclamations about the POTENTIAL of a business that’s on the market. In investment real estate circles, seemingly every other brochure touts UPSIDE POTENTIAL as the reason buyers are cordially invited to overspend on a rental property.
The term gets people riled up because it’s usually untrue. Or unprovable. Or the chief architect of unreasonable expectations. Without the guiding hand of an experienced intermediary, owners often board the Potential Train, bound for nowhere, in search of a turnip truck buyer who never arrives.
Businesses don’t trade on potential. A buyer may indeed see some unrealized potential down the road through improving management, marketing or sales efforts. But buyers aren’t in the business of rewarding sellers for work they haven’t done.
Business broker Ted Burbank wrote a terrific book nearly a dozen years, “How to Become the Best Business Broker in Town,” that made a lasting impression on me. One excellent point he makes is the distinction between potential and opportunity. The two words sound quite similar but he astutely points out the tremendous differences for business buyers and sellers.
“Owners are unaware of the damage inflicted on their business’s value by emphasizing its potential. It’s a natural and innocent mistake virtually everyone makes.” He compares it to a schoolboy whose teachers and parents constantly talk about Johnny’s potential – and how he’s not achieving it.
Buyers will likely see all that potential but they’re not about to pay the seller for it. Why should their hard work down the road go into the seller's pocket today? But here’s what they will pay for – opportunity. Burbank writes “It’s perceived differently. Opportunity has already been created by the seller. It’s there. You created the opportunity and are willing to let the newcomer reap the advantages of your hard work. Any reasonable person must be compelled to compensate you for the opportunity you have created. It’s only right.”
Prices based upon opportunity are always superior to those based on potential. The buyer who sees the most opportunity pays the highest price. The buyer who sees a seller demand a high price based on potential typically runs the other way.
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