A good friend of mine is fond of saying that there is a buyer out there somewhere for any business out there – you just have to find them. While there is a degree of truth to that statement, it doesn’t tell the whole story. It is estimated that less than 20% of businesses that are listed for sale actually sell.
Over the past couple of years, many businesses have not sold and many would blame a combination of general economic conditions and a lack of financing. There is a lot of truth to that explanation. However, many businesses actually have sold during that period. Many others haven’t.
This article explores some of the reasons that businesses don’t sell.
A lack of information about the business is often a major issue keeping a business from being sold. Financial statements and tax returns may be incomplete, erroneous or late. Many businesses prepare financial statements primarily in connection with filing tax returns that may be extended to nearly nine months after the end of the year. If a buyer is considering an acquisition, they will almost always lose interest if financial information is not forthcoming in a timely manner. If the financial statements do not break out the elements of the business in a way that is understandable to the buyer and there questions cannot be addressed, it is likely they will either pass on the business completely or make a low-ball offer. Fort example, I have had clients in the green industry that had design/build revenues, maintenance revenues and garden center sales all on one line in their financial statements. They could describe how much of the business was represented by these sources, but they couldn’t back it up with records. It is also common for business sellers to begin to talk about their “cash” business in the belief that they can enhance the value of their business. I once even heard a business owner tell a potential buyer that he could prove his cash business by literally “showing him the money.” Not only will a business buyer discount such assertions, they are likely to be completely turned off.
Cash flow is the driving force behind business acquisitions. Potential buyers evaluate an acquisition on the basis of the cash flows they can generate from the business. If a business does not demonstrate adequate cash flow, it is unlikely to be sold as an ongoing business. It may, in some cases, be able to sell a business on potential, but this is difficult and often results in low prices, partly because such acquisitions cannot be financed. Otherwise, the business can only be valued based on its hard assets.
Buyers will also be concerned with the quality of the revenues and cash flows being generated by the business. How dependable are those revenues? How likely are customers to remain after an acquisition? Is revenue recurring or will the buyer have to resell customers? Do most of the seller’s revenues come from only a handful of customers?
If a business is overpriced, it may not sell at any price. Buyers will be reluctant to enter into discussions with a seller who is asking a much higher price than the buyer would be willing to pay in the belief he may be wasting his time or insulting the seller. They will usually just move on to another opportunity. It is natural for a business owner to want to get the best possible price for his business. It is best to get an expert opinion from someone who will tell you the truth – not just what you want to hear. In the green industry, many business owners hear stories at the multiple of revenues that businesses sell for. They believe that if a competitor got 85% of revenue as a sale price, then surely they should get at least that much. The real basis of pricing is usually the cash flow of the business, or at least the cash flow that the buyer will be able to generate from the business. You can only really compare pricing based on revenue if the margins or potential margins of the business are similar.
Some businesses will not sell because the seller is not motivated or flexible in dealing with a potential buyer. They may want to sell, but only if they are able to receive their own unrealistic perception of the value of the business. They may be unwilling to consider such features as offering some seller financing. All other things being equal, a buyer will be attracted to a motivated seller.
Location is also a factor in whether many businesses will sell. Many businesses are not easily relocatable without an impact on the customer base. If a location is undesirable or there is no certainty that the location can be retained because the lease is short or may not be assumable, the business may not sell.
Poorly selected advisors are another reason that businesses don’t sell. To make a sale more likely, sellers should look for advisors, including attorneys, accountants, brokers and others, that are deal makers, not deal breakers. Deal breakers may try to renegotiate aspects of a potential transaction that the seller has already agreed to. This creates discomfort with a buyer – do they have a deal or not? It slows down the deal and runs up everyone’s fees. This usually happens with the best of intentions, protecting the interests of their clients, but often has exactly the opposite impact, making a deal that was within reach impossible to complete.
Poor market exposure is another common reason businesses don’t sell. Any business broker can post an internet listing for a business listing, but what else do they do? Can they identify, target and contact buyers who would be interested in the particular business being sold or do they just list it and wait for something to happen? Many businesses do not sell because the people who would be interested never hear about it. This is an extremely complicated topic because of the confidentiality concerns that most business sellers have, but it is crucial, because the more qualified buyers who know about the opportunity, the more likely the business is to sell and at a good price.
Sometimes, businesses do not sell because there just really isn’t anything there to sell. That can happen when a business owner waits too long to make a move. It can also happen when the business may be totally dependent on the identity and personal services of the owner. On the other hand, it can also happen when the business is totally dependent on employees who are really not tied to the business.
There is no silver bullet, but it is worth asking what factors make it more likely a business will sell. Here are some:
- A sustained track record of quality revenues, profitability and cash flows.
- Good quality, timely financial and other records.
- A good location, well-maintained.
- High quality customer relationships tied to the ongoing business, not just its owner.
- Informed, reasonable, motivated, and flexible sellers.
- Professional advisors who know how to make deals work.