There are clear lessons that can be learned when it comes to the common characteristics shared by owners who fail at selling their business. Even though the actual figures vary; the fact is only a minority of businesses ever find a buyer.
Let’s take a look at some of these characteristics. Do you fall into one of these categories?
The business is priced too high
This is probably the most common reason; the business owner has unreasonable sales price expectations. Because most business owners have never sold a business, they can’t draw on personal experience to guide them through the process. They end up reaching out to friends and family advisors to try and get a grasp of what they should expect. The advice that is given – unfortunately – is never based on reality.
Finally, out of sheer frustration, the owner contacts a business broker but he fights against every piece of advice he is given because he still holds onto the poor advice he received from his advisors. He cannot let go of his unreasonable expectations so the potential buyers brought in by the business broker pass on the purchase.
The business isn’t ready to sell
The degree of risk that potential buyers take on is high, especially when the owner is the main driver of his/her business. If the risk potential is too high when the business is placed on the market, prospective buyers will do one of two things: demand a higher price to match the risk or pass on the opportunity altogether.
The lack of available finance
Bank finance for company acquisition is hard to acquire (even more so with the shape credit markets are in right now) when tangible asset backing is lacking. Even though private equity and mezzanine finance funding are prevalent; most SME’s lack the ability to tap into this source simply because of scale and deal structure. Vendor finance and earn-outs (disguised vendor finance) are other options but they are less appealing to the owner since these are deemed as risk inherent arrangements. Unless there is a cogent proposition; one that gives confidence to the financiers, it is doomed to fail.
The lack of possibility for growth
Foremost in a potential buyers mind is ensuring business sustainability – opportunity for growth. They hope to recoup their initial investment within a reasonable period of time and achieve a long-term return that outweighs other potential asset classes. Before executing an exit strategy of their own, most business buyers seek to build value so they will have the opportunity to realize an increase in value. Without growth opportunities, a business holds very little appeal to a potential buyer.
The investment is low on return
Over the years, I have found that most owners do not appreciate the fact that in the mind of the buyer, a privately owned business is just an asset among many other asset classes. Return relative to risk, leveragability, capital growth, liquidity, income streams and other considerations are essential to the decisions investors make when it comes to investing. In order to attract private or corporate dollars, a privately-owned company must stack up!
How do you ensure that your business is one of the chosen few?
Don’t be one of those buyers who continue seeking advice from the uninformed, do no preparation for the sale ahead of time, refuse to seek out creative finance, decline growth and laugh at the fact that most buyers will not find their business the best thing since apple pie!
Instead, follow these tips:
- Seek out a qualified business broker for advice
- Minimize risk
- Prepare ahead of time for the sale of your business
- Maximize opportunity
- Understand and appreciate the buyer’s motivation
- Situate your company so it will have broader finance options
Call us today for more information or contact us for a free business review.