Why Businesses for Sale Don't Sell

Even many salable businesses don’t sell. That’s the dirty little secret. About 35% of those that are offered for sale that don’t sell, are pretty much unsalable for reasons such as:

-They are in very deep financial distress and have no significant value to a buyer

-There are legal problems prohibiting a sale

-A landlord refused to renew a lease

-They lack reasonable documentation of financial or non financial aspects of the business

-Partner disagreements: not all owners of the business are on the same page regarding its sale.

So what about the other 65%: those businesses that are salable but don’t sell? Well, there are lots of reasons for this unfortunate situation:

Poor Packaging

Successful business owners understand very well that their products need to be properly packaged to be successfully marketed. So, I’ve always wondered why so many business owners don’t understand that their business itself needs to be properly packaged to be salable.

The vehicle for packaging a a business for sale is a presentation sometimes called a selling memorandum. This document presents the opportunity from an acquisition perspective. It describes the business in financial and non-financial terms.

Important: In preparing your selling memorandum, do not reveal specific names or information that you want to keep confidential. Even though you will only provide your information to those who have signed a non-disclosure agreement, you certainly don’t want to get into an expensive legal confrontation over a breached agreement.

Poor Prospecting

It’s very easy to find people who think they want to buy a business. However, there is a long road between saying “I want to buy a business” and actually closing a deal. If you don’t screen for financial ability and for at least a basic understanding of the commitment involved, you’re going to spend a lot of time with tire kickers and wishful thinkers.

Many salable businesses don’t sell simply because the seller never finds the right prospects or doesn’t screen well enough to separate the real prospects from the time wasters. You can't be shy about asking a prospect to prove he or she is financially qualified to make a deal. Many business owners get so frustrated with talking to and meeting with unqualified prospects that they simply give up. This is as understandable as it is unfortunate.

Wrong Asking Price

Needless to say, buyers and sellers don’t always see eye-to-eye on the value of a business. Some salable businesses don’t sell because the asking price is just too high. But in other cases, the price may be reasonable, but the seller hasn’t properly justified it. There is (or should be) some clear rationale behind your asking price, other than “this is how much I need to retire”.

Buyers will often ask the very reasonable question, “So how did you come up with that asking price?” If someone asks that question, it’s a sign that they are a real prospect, so it’s important to have a ready and fully defensible answer. Even better: have a third party business valuation ready to present to each serious prospect. If the asking price is reasonable, if buyer and seller get beyond square one, usually price differences can be bridged.

Almost as many deals fall apart over terms as over price, as the next section explains

No Flexibility on Terms

Very few businesses are bought entirely with all cash at closing. Yet, most seller’s of small businesses start out insisting on an all cash deal. For a number of reasons, a deal with some amount of the selling price held back and paid over time is a buyer’s preferred scenario. But a deal with some payment over time can have benefit to the seller as well.

Firstly, it will be easier to make a deal if you take back paper, at least for a modest percentage of the purchase price. You also may end up with more money. For example, which is a better deal?

Option 1. selling price: $1,000,000, all cash.

Option 2. selling price: $1,200,000 with $900,000 upon closing, and $300,000 over 36 months at 5% interest.

Well, some sellers might choose Option 1 and others might choose Option 2. Of course, it partly depends on the buyer. If the buyer is creditworthy and you believe he can do a good job managing the business, Option 2, may well be the better option.
That’s a very simple example of how a cash deal may not be better than a deal with some percentage of the selling price over time.

Sellers sometimes insist on other terms that make a sale difficult such as deal structure (asset vs. stock sale), limits on non-compete agreements, promises to retain certain employees, and more. There are good reasons to define terms and preferences in advance. However, few companies are so unique and valuable that their seller’s can make all the rules and expect buyer’s to follow those rules. You need to be flexible to make a deal happen.

A business sale is a complex transaction. It’s seldom a matter setting your terms, agreeing on a price, and getting a check. Generous consulting agreements with the seller can be built into a deal, as could specific security agreements, and more. Insisting on a simple all cash transaction or on take it or leave it terms will make a deal far less likely to get done.

Lack of Preparation

Ideally, you should start preparing your company for sale at least six months prior to putting it on the market. There are a few easy steps you can take that will significantly improve the value and marketability of your company, if you start the preparation far enough in advance, and do the planning diligently.

Curiously, many business owners who are meticulous about planning every other aspect of their business, do almost no planning when it comes time to sell their entire company. Unfortunately, many salable businesses don’t sell because there is inadequate upfront planning for the sale.

Why Businesses for Sale Don't Sell

About the Author

Related Topics

Other Related Topics