Surveys of the business brokerage industry maintain that only 30 percent to 40 percent of businesses that are listed for sale actually ever sell. If that number is accurate, and in my experience it is, why don’t more businesses sell, and what happens to the majority of businesses that want to sell but don’t?
The reason the majority of businesses listed for sale don’t sell is typically one of three things:
• The owner has an unrealistic expectation of the business’ value and, therefore, the business is priced out of the market.
• The business is losing money and/or is not viable as a going concern.
• There is a fundamental flaw with the business and/or the business model.
Sometimes one or all three of these conditions exist at once and work in tandem.
I believe that every business can be sold, provided that one of the above three issues doesn’t exist, and even if one does, that it can be managed by the owner and, with the help of a realistic action plan, can be overcome to ensure the successful exit of a company.
Having a realistic expectation of a business’ value is the most manageable condition and perhaps the easiest fix. For many owners, it can be difficult to come to a realistic value. This is understandable because most small business owners have invested a significant amount of time and money, not to mention blood, sweat and tears, into their business.
Determining a realistic value of the business is essential and will do the most to prepare a business for sale. How can a seller create a realistic expectation of value? First, do some research. Although private business transactions are often not reported, I typed “Valuing a Business” into Google and got some good information. If your business has a trade association, the group might have some useful information as well. Doing some basic research can go a long way in giving the seller comfort.
Next, talk to an advisor who has transactional business sales experience. That can be an attorney, certified public accountant, business consultant or business broker/mergers and acquisitions advisor. Make sure that the person has real-world experience in the type and size of business that you are considering selling. Theory is great, but you want someone who has done this before and can give you an honest assessment of the value. I have been involved in hundreds of business sale transactions, so I have a pretty good handle on what most businesses will sell for. Make sure that whoever you get advice from can do the same.
Get an independent and objective third-party business appraisal. An appraisal will give you the most information on the business’ value and will be the most thorough. This can be expensive, but a good appraisal will give the business owner a much better idea of the value and can be useful in negotiation with a potential buyer. The appraisal must be objective and, therefore, it should not be provided by your current bookkeeper or CPA.
It should be completed by someone who performs business appraisals on a regular basis. Since a state license is typically not required to execute business appraisals (unlike in real estate), review the appraiser’s qualifications and designations.
The second two issues are more problematic and more difficult to repair. A business that is losing money can be very difficult to sell. On top of that, the business model might be flawed, creating the losses in the first place. Questions that need to be asked are, “How long has the company been in business?” The majority of businesses fail within the first five years. “Has the company been viable for longer than this period of time?” “What is it about the business that isn’t working?” “Can new products or services be offered under the current model that will create appeal to the clients being served?” “Can any flaws identified with the business model be fixed?” “If so, how can they be fixed?” These questions have to be answered honestly in order for the business to be repaired and put in a position to be sold. If the flaws can’t be mended, it might be time to rethink the business in general and, possibly, wind the business down.
After reviewing the business model for viability, you may determine that the business might be losing money but the model itself is not flawed. The owner needs to look at why the company is in the red. A business that is losing money can be very difficult to sell. Buyers will not want to take on someone else’s burden. Many business sellers who are in trouble often try and convince a prospective buyer of the business’ potential and that, under new ownership, the troubled business will thrive. Buyers often do purchase businesses based on their potential, however, they typically will not base a price on potential. They will want to purchase the business based on financial results.
To improve the business’ profitability, scrutinize every expense. Remove expenses that are not necessary, and reduce expense items where ever possible. Once these changes are made, those items can be added back to the financials, retroactively, to show what the business would have looked like had those changes been made.
By educating themselves about the reasons why businesses don’t sell, owners who desire to exit their companies via sale stand a much better chance of completing that goal.