Myth #1 - Finding the “Diamond in the Rough”

According to popular legend, many purchasers insist there are numerous “diamonds in the rough” - found in a place called “the market”. The purchases who believe this legend will assure you that these opportunities do exist but that they are very difficult to find. According to experts, a “diamond in the rough” is essentially a business which is very profitable but for some reason, is available for sale at far less than fair market value. Seemingly normal and intelligent prospective purchasers believe this myth to be true citing many actual examples from the department of here-say. According to these purchasers, a vendor will sell a profitable business below fair market for a variety of reasons including:

  1. The vendor has no succession plan.
  2. The vendor has health problems.
  3. The vendor just wants to see his business continue and isn’t really concerned about price.
  4. The owners-shareholders are not getting along and want to sell.
  5. The vendor isn’t getting along with his employees and wants to sell.
  6. The vendor doesn’t know how much his business is worth.

While all of these factors could be true, the fact is that most vendors, regardless of their situation will want to get fair market value for their business. The diamond in the rough myth ignores the economic principal of market demand. If a vendor does decide to sell their business they will usually expose it to an open market in hopes of obtaining the highest price for their business. The reality is that purchasers looking to find a vendor who is prepared to sell their profitable business for much less than fair market value, will have more luck betting on a “hot tip” at the horse race.

This Myth is busted.