Preparing to Sell Your Business. Why Are Some Businesses Difficult To Sell?
Thinking of preparing to sell y our business, consider the following statistics. In a survey of a broad cross-section of Merger and Acquisition (M&A) Consultants, one of the questions posed was, “What is the biggest challenge you face in your practice?” They were given eight choices including lack of financing and not enough buyers. They were asked to pick their top three. The top answer was seller value expectations with a 68.9% response rate. I don’t understand why this is the biggest challenge our industry faces. From my perspective, this translates into a great deal of wasted effort on the part of our buyers, our seller clients and the M&A Advisor. Statistics show that the average business sale closing ratio is less than 76%. This is so important that I am going to say it again. The business sale closing ratio is less than 76%. It fails 24% of the time! Why is that?
The following are 10 top key reasons why many businesses do not sell.
- The business is extremely overpriced, in some cases by as much as 100%.
- The business has several family members in top management.
- The owner is the business so that the business cannot effectively run without the efforts of the owner.
- One or more customers constitute more than 25% of the total business.
- The industry that the business is in is diminishing or threatened by globalization.
- The owner(s) is aging and has slowed-down, resulting in diminishing revenues.
- The owner did not take time to perform exit planning. To properly prepare for selling businesses, the owner should have engaged an Exit Planning Advisor 2-5 years prior to selling.
- Many of the financial rewards of the businesses were taken by the owner in various “perks” which, from valuation, banking and market perspectives, will not make it to the EBIDTA as add backs.
- The seller did not take time to become educated on the selling process, especially on the possible ugliness of the due diligence process by the buyer team.
- The owner did not hire a proper professional such as a trusted M&A Advisor, as opposed to a broker that usually works both sides in a sale process.
Attracting buyers for your business
Another major reason for the low closing ratio is that most businesses are attempting to be sold through newspaper ads, industry publication ads, email blasts to private equity groups, email blasts to other brokers and the favorite – putting the business on several businesses for sale websites. Almost all of these approaches invite individual buyers, not corporate buyers. Individual buyers are looking to buy a job and, to the extent that business sellers have inflated value expectations, these buyers have equally deflated valuation expectations. It looks something like this: “Do you have the $$ minimum needed for the cash at closing?” “No but I have investors.” These investors never show up.
Without properly preparing for selling businesses and arming oneself with a proven process, there will be a huge valuation gap between what the business seller expects to receive and what and what a reasonable buyer sees as fair market price. The approach that many M&A Advisors take is not to resolve the differences, but to simply give in to the unreasonable expectations of the sellers and put the business up for sale based on the seller’s terms. Beware of this approach when selecting the right M&A Advisor. The proper approach is for the M&A Advisor to tell the seller what they “need to know and not what they want to hear.” A business owner needs a trusted advisor not someone who will do anything to get a business listing for sale, only to have the business sit on the market for many years or never sell at all.
Selling a Business takes years of preparation and the use of a proven process. No business owner can keep their business running while at the same time sifting through streams of bargain hunters who may, or not, end up purchasing their business. Without a proven process and a good amount of preparation, these bargain hunters will chip away at the carefully developed price for the business. Years of dealing with the constant challenges and questions of the so-called potential buyers, the business often suffers a significant drop in performance. Key employees often get nervous or even leave, and, like an overpriced home, the business becomes stale while sitting on the market waiting for the right buyer to come along.
For owners selling businesses that are B2B and or a larger business, your buyer will not be an individual, but rather a corporation or a private equity group. Let’s focus here on the corporate buyer. If the potential buyer is under $50 – $100 million in revenue, the M&A contact is usually the president. If the company is larger the contact is typically the head of a strategy, business development or mergers and acquisitions. These individuals are not visiting a business for sale websites or searching the business opportunities section of the newspaper.
The business owner’s first task is to recognize that reaching these corporate buyers is a very difficult and labor-intensive process. In these situations, it is wise to enlist the services of a M&A firm that specializes in reaching these targeted buyers. These M&A professionals normally require either an up-front fee or a monthly fee in addition to the contingent success fee.
In summary, I cannot stress enough the need for proper preparation for selling a business. The process to properly prepare for selling a business takes approximately 2-5 years, it is not very costly, and does not take much time but the results can be phenomenal and will result in a much higher valuation. The time invested in this process will also significantly improve the marketability of a business.
By Brian S. Mazar, CBI, MBA