Surveys of the business brokerage industry maintain that only 25 percent to 30 percent of businesses that are listed for sale actually ever sell.
The three main reasons the majority of businesses listed for sale don’t sell:
• The owner has an unrealistic expectation of the business’ value.
• The business is breaking even or losing money.
• There is a fundamental problem with the business and/or the business model.
Sometimes one or all three of these conditions exist at once.
Most businesses can be sold, provided that one of the above three issues doesn’t exist, or a new owner has the ability to fix the problems.
Having a realistic expectation of a business’ value is a manageable condition and perhaps the easiest to solve. For many owners, it can be difficult to come to a realistic expectation of 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 “baby”. Selling the business is like one of their children who is about to leave home for the first time.
Determining a realistic value of the business is essential and will do the most to prepare a business for sale. How to do this? First, do a little research on business valuations. Many business owners think the business is valued on a multiple of revenues. A buyer is much more interested in the businesses EBITDA or re cast earnings than revenues. Getting a realistic value for your business should be the first priority. Because Empire Business Solutions is an experience M&A specialist, we can help you determine a realistic value for your business. We have access to valuation software and transaction comparables which can provide a basis for a realistic price for your business. Please call us for a free article on valuation or a free consultation on selling your business.
Next, talk to a M&A/business broker advisor who has transactional business sales experience. Make sure that the person has real-world experience in the 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. Most M&A/business broker advisors have software which can generate a reasonable opinion of value so you can get an idea of value.
If the initial indication of value from your advisor is within reason of your expectations, the next step might be to get an independent and objective third-party business appraisal. A formal appraisal will give you the most information on the business’ value and will be the most thorough. This can be expensive but 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, if not impossible, to sell. On top of that, the business model might be flawed or not working right, creating the losses in the first place. Questions that need to be asked are as follows: How long has the company been in business? Is the business model viable in today’s economy? 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 the business model be fixed? These questions have to be answered honestly in order for the business to be repaired prior to sale. 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 or impossible to sell as 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 but on the past financial performance.
To improve the business’ profitability, scrutinize every expense. Once changes are made, those items can be added back or adjusted 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.