A little research (we’ve done it for you) about the challenges in selling a business is very helpful. Statistics suggest that 4 out of 5 small businesses failed to sell, generally those that failed to sell were placed for sale by the business owners themselves. It is a little-talked-about issue when selling a privately-held business that the success ratio is so low. Many studies show that the odds an average business owner has of successfully selling their business to a third-party acquirer is between 15-25%.
That means there’s a 75-85% chance of failure. So, how can a small business owner dramatically increase the odds of selling successfully and profitably, that’s what this article will explain.
To understand why the odds are what they are so often, let’s look at what causes such a high failure rate among privately-held, small and lower-middle-market business sales?
Here are the top reasons:
Business owners over-value their businesses.
Many business owners believe the years and tears they’ve expended to get their business to its current level somehow make the business’ value high. This way of thinking is either a big misperception or a formula for never selling. A “sale-able” business is about the future not the past. Whatever price (in money, resources, or time) the seller had to put in to achieve success does not determine the business’ value. For a buyer and/or their funding source(s) to be interested, there must be a Return on Investment that makes sense for them. The most common reason, by far, for buyers to seek acquisition is because of the foreseeable income and profit opportunity. Your IAG M & A Advisors’ Transaction Specialists can explain this in detail as to how buyers and banks look at a business’ value.
Skeletons, whether in the closet or apparent, prevent sales or significantly reduce offers.
Buyers – and especially banks that fund acquisitions – will avoid a business with a looming IRS issue? How about HR compliance woes, a history of safety violations, excessive warranty claims, potential litigation, and other “negative” historical issues? If a business faces challenges like these, it’s important resolve them before seeking a full-price sale. If the business does go to market with serious issues in play, it’s likely to remain unsold or, at best, be a distressed situation where the offers are minimal. IAG M&A Advisors spend time reviewing the business’ history to look for red flags or trouble spots that might negatively affect a sale so that they can either be resolved or adequately explained so that buyer prospects aren’t blind-sided during due diligence and, consequently, walk away.
Unprepared or ill-prepared financials will create untold problems.
When, for example, tax returns show very little profit compared with P & Ls, buyers (and funding banks) tend to pass those opportunities. The buyers and the banks are leery of accounting abnormalities that cannot be explained, hopefully, in advance. IAG M & A Advisors contracts independent, certified experts to go through the business’ financials and account for “add-backs” and other cost that a new buyer would not have upon acquisition. This is very vital to get full value for your business.
Many business owners think they can sell their business without the aid of transaction specialists. Instead, they choose to self-negotiate, often depending on their attorney (typically a generalist) and their CPA (typically a tax-preparation focused accountant) to advise them in selling their business. Is that wise or the best strategy?
While these professionals may be important in the running of your business and, if ideal, have your best interests at heart, they may not be the wise choice for selling your business. Clearly, they don’t want to lose a valued client, which would be the case if the business is sold. There is plenty of data to suggest that they may subconsciously seek obstacles to show the deal isn’t great for you. If nothing else, they will seek to point out the negative and often highlight the “worst case” scenarios to discourage the sale of the business.
Even if they are absolutely committed to helping you sell your business, by and large they are not M&A specialists? They may have handled a few M&A deals in the past and so you – or they – think they can handle yours. No offense intended, but working with a transaction specialist for what is likely the largest financial and legal transaction of your life is highly recommended over relying on those with far less experience or focused expertise.
According to one author, “Not doing so would be like taking your only child to a general practitioner for once-in-a-lifetime, life-altering surgery just because it may cost less or because your family has used this doctor for primary care needs for years. Reality is that a specialist who might appear to be more expensive – but who exclusively performs that particular surgery – would provide far better odds of achieving complete success for your child. Translation: When selling your business, this isn’t the time to pinch pennies.”
Hire top specialists! They’ll more than pay for themselves when they help you avoid costly mistakes, are more efficient, and provide a much-improved sale outcome. IAG M & A Advisors is one of the largest and most successful M & A firm representing small to lower middle market businesses.
Two more challenges that can cause businesses not to sell: indecisiveness about selling and lack of patience.
Sellers must be committed to selling their business. Otherwise, the pressure when confronted with an offer (and the many things needed to be done to move from offer to closing) often ends with the seller walking away, feeling uncomfortable, and pulling out of any negotiations. Even with fair and profitable deals on the table, too often sellers walk away when they are not completely ready to sell their business.
Patience is a virtue when it comes to selling a business. Not only does it take time to get offers, but buyers can take a much longer time to complete a transaction than the seller thinks is necessary (for personal reasons or for bank requests that delay a timely closing date). In too many cases, the seller can get frustrated and walk away from the deal in anger. Patience is a virtue because a bird in the hand, so to speak, is often better than waiting for the birds in the bush to make an offer. Sometimes, walking away from a fair and profitable deal can cause the seller to find no new takers and the relationship with the previous one has been damaged. IAG M & A Advisors staff are extremely helpful to calm nerves, help expedite matters, and keep the transaction on track for a successful close.
In a nutshell, if the sale of your business goes the way 4 out of 5 do and doesn’t close, especially if you tried to do it on your own without being prepared for all of the challenges involved in successfully closing the deal, who killed your deal? You did!
You killed your deal if you overpriced it, went to market with risky and unaddressed situations, were unprepared for all the documents and questions that needed to be created or answered during negotiations, tried to self-represent with advisors who concentrate in general law and income tax accounting, tended to be impatient or were not committed to selling your business. Those are some of the key reasons why a large percentage of smaller and lower-middle market businesses fail to sell.
To beat the odds, do what the successful 20% do:
Let IAG M & A Advisors help you understand what your fair market value is before going to market or setting an asking price. They will help you get an independent, certified valuation. Have the IAG Transaction Specialists help you understand the major obstacles or red flags and how to deal with them. Let IAG help you find the right buyers, help that buyer obtain financing, and provide knowledgeable assistance to you from start to finish.