Some entrepreneurs seem to have a business "green thumb". They start a business, grow it quickly, and then miraculously sell it for higher multiples than most other similar businesses - without much forethought, following best practices or comprehensive business plan. Or they quickly build it, franchise then sell to a private equity firm.
Sometimes these entrepreneurs are lucky. They are at the right place, at the right time with low barriers to entry, low competition and high demand. One example is Renter's Warehouse. They came out of nowhere in 2007, capitalizing on the housing downturn and the fact that people were upside down in their mortgage and couldn't sell their houses. Then in 2011 Dollar Shave Club made it big - remember the famous commercial that launched the company with 12,000 orders in two days and millions of views (the warehouse was rented just for the commercial)? In 2016, Dollar Shave Club was acquired by Unilever for $1 billion in cash.
Whether skill is involved or not, just making it as a small-business owner has got to involve some amount of luck.
The odds of starting and succeeding as a small business are far from positive:
- Only half of small businesses make it past five years
- One in two businesses close every year
- 19% of small business owners work over 60 hours per week - who's kidding we know it's probably higher than that
- Banks approve only about 26.9% of small business loans
Most business owners who have sold their business, or those professionals working with business sellers, know that it is actually harder to sell a business than start one. As a matter of fact, according to statistics, only about 20-30% of businesses for sale will actually sell.
But how much is luck and how much is skill? What can you do to tip the scales in your favor? The reasons for startup failure are mostly likely lack of market capital, lack of market demand and putting the wrong team in place. Interestingly, the reasons businesses fail to sell mostly include seller's unrealistic expectations about what their business is worth, poor financial records, an owner's inability to let go, poor financial performance trends, and the wrong customer concentration.
Professionals who help business owners prepare for and ultimately sell their business would argue it requires more skill than luck. Knowing what the market will bear, understanding what buyers and lenders are looking for, being able to position your business (confidentially) to attract qualified buyers and selling for the highest and best offer all take knowledge and skill.
1. Business Value
Most business owners have an idea of what they want to get for their business, without understanding how businesses are valued and what buyers are looking for. Engaging with M&A experts (attorneys, cpa's and business brokers) will help you better understand what criteria is used to value a business, and what your business is actually worth to buyers. These professionals have vast experience and competitive information business owners don't have ready access to.
2. Inability to Let Go
In order to successfully sell their business, business owners will need to look at their business through the buyers' eyes and remove barriers for success. Buyers don't, and can't, buy the owner. Buyers buy the owner's business. If the business revolves too much around the owner, their time, skills and reputation, it will be much harder to find a willing buyer, because the business' success relies too much on the owner being present. Business owners who want to sell their business must prepare by first "letting go", hiring competent staff and management to run the business so a buyer can step in and be up and running on day one. Educate yourself on the buyer's expectations to prepare successfully for a future sale.
2. Clean financials
Three years of clean financial statements and tax returns is the minimum information required to be able to accurately assess business value and demonstrate business trends to buyers and their lenders. Business sales professionals can help make sure you are allocating expenses correctly, clean up your inventory and look at your records from a buyer's/lender's perspective.
One way to prepare for a business sale is to get a business valuation. This process will help you uncover weaknesses in your financials and allow you to make adjustments in preparation for a sale.
3. Financial performance
Although luck can play a role in a businesses performance, buyers and lenders look for businesses that have sales and profitability that trend (several years) up with consistent profitability and enough cash flow to cover financing.
Sellers can prepare by knowing what buyers are looking for. Keep a close eye on the key performance metrics in your business and the industry as a whole. What is your gross and net margin, concentration of customers, percentage of costs to sales? How is your business trending both from a revenue and profitability standpoint? If you are focused more on reducing taxable income than creating an attractive business for a buyer it will hurt your chance of selling.
Considering these inhibitors to a successful sale - selling your business without planning, valuing it to meet your own financial goals and failing to use Advisors with specific business sales experience will hurt your chances of a successful sale. So don't leave it up to luck. Contact a Business Advisor who can start you on a path to a successful sale.