Selling a Business

Entrepreneurs need their own team to navigate the sales process.

Why Don't Businesses Sell?

posted by: Scott Hislop
Sep 26, 2018 1:21:26 PM

A large percentage of businesses listed for sale never do.  Following are the “Dirty Dozen” reasons why businesses fail to sell.

  1. Priced unrealistically high.
    • Errant multiples and rules of thumb: You’ll hear many multiples that are used to price businesses.  Multiples of sales, EBITDA, Seller Discretionary Earnings, and net income to name a few.  5 times net income may be appropriate, where as 5 x Seller Discretionary Earnings may be entirely unrealistic.
    • Seller has an unrealistic view of the value of the business assets. The Seller knows how hard it was to build, buy, and maintain.  Sometimes it is hard to see that a buyer would not have the same value perception when they didn’t have the blood sweat and tears to build it.  Your “baby” is only worth the earnings it can generate to a buyer.
    • Seller debt: Sometimes the amount the seller owes on the business is more than the market value.
  2. Insufficient earnings to support the buyer’s needs. Usually the seller has enjoyed recent years with less financing payments.  Remember the cash flow crunch days and what it would be like with your current earnings after making the financing payments for your sale price on top of normal operating costs.  Does your business earnings support payments and an expected lifestyle of most buyers today?
  3. Incomplete business records
    • Camouflaged financial reports will not pass buyers and their lenders requirements.
    • Missing data will lead buyers to squint and cause anxiety that can and does cause deals to implode.
    • Even slow information gathering can kill deals.
  4. Inability to transfer or negotiate a new buyer lease. The landlord is king in business sales.  Ideally a seller would have significant time remaining on a lease that can be transferred or other leasing options.
  5. Decreasing sales and / or earnings. No one likes to catch a falling knife!  Would you pay more, the same, or less for a business with rising, stable, or decreasing sales?  If sales are decreasing rapidly, it may be a foot race to decrease price to the point a buyer will accept the cost and risk of rebuilding the sales.
  6. Inability to obtain lender financing requirements. If it doesn’t make sense to a lender, perhaps it is over-priced for the earnings?
  7. Lack of Seller financing. All buyers and most lenders like the seller to have some skin in the game.  The majority of closed business sales have some seller financing involved.
  8. Lack of confidentiality: Sometimes sellers that try to sell their own businesses find they have no business left to sell after word leaks out to their employees, customers, and vendors.
  9. Outdated equipment and / or processes. Some of the equipment and processes you are proud of have become more obsolete than you would like to admit. Not replacing old equipment can make the business feel outdated and lower its value.
  10. Inappropriate information timing in negotiations and due diligence. All buyers want to start the training process early.  Rarely, does anything good come from this, and has been known to kill deals.
  11. Pride, win-lose, and micro-managed negotiating tactics prevent counter offers from being signed. Personalizing low ball offers creates emotion that stops discussions from continuing that could have potentially ended in a sale.
  12. Timing sucks: Timing is everything.  There are good businesses that are priced right that won’t sell just because of lousy timing.  The take home message here is: Make hay while the sun shines.  The timing to harvest the highest value for your business is rarely the same as the ideal time to retire.  For value optimization, it is almost always better to sell on the highs of the business performance than after you have coasted awhile.  Selling during good times when lender capital is available is good.

Bonus reason:  13. Trying to hide negative business information.  It almost always comes out in due diligence, and can destroy a sale.  It is almost always better to disclose everything up front and develop a plan to explain or fix the problem issue.

Here’s the good news:

All businesses have a wart or two.  Just because you have some of the above things going on in your business doesn’t make it unsaleable. Transworld Business Advisors are experts in market valuation, marketing your business confidentially, negotiating, and process flow to optimize your chances of a successful sale.  We can help with all of the dirty dozen except #12.  The timing is up to you. While no one can predict the best timing, most can see that now is a great and vital business climate with good capital accessibility.  Give us a call if you would like to know more of our proven and confidential business sale process.

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