The majority of owners who spend their time, energy, and vision building their own businesses hope someday to either pass them on as a legacy to their families or sell them to another energetic entrepreneur. Unfortunately, in many cases, these sales will not materialize. By some estimates, only 15% of business owners who are planning on selling have a valuation of their business. And the Exit Planning Institute has found that perhaps only 20%-30% of businesses for sale at any one time will sell, leaving their owners with a trifecta of less satisfactory choices: continue to operate the business, lower the price, or shutter it entirely.

Entrepreneurs are, by virtue of their nature, creative, and creative people prefer to be paid for their work. The problem is, the skill sets necessary to build and maintain a business are not always the ones needed to sell a business, and owners are often not objective enough to see the steps that need to be taken for a successful sale to go through. For this, they need a Mergers & Acquisitions (M&A) Advisor, someone who is paid to take a good, hard look at the business and make the changes necessary for the sale.

At some point, owners need to step back from working in their business and work on it. The alternatives are not desirable: lower price, longer post-sale commitment, and seller financing.

As any experienced M&A Advisor will tell you, there are a number of reasons businesses fail to sell. We’ve seen businesses stubbornly fail to move for many reasons, but the most critical reasons may be found below.

Owner dependency

Many business owners are intrinsically tied to their businesses. They created them, they run them, and they have established the critical connections to keep them in the black. The issue is that without these owners, the businesses can’t function effectively, or in some cases, at all, and any informed buyer will recognize this once they start asking questions. A company is much easier to sell when it is not dependent on one person, and specifically, the person who will be leaving the business upon its sale. We talk about this extensively here.

Many years ago, we represented a small IT services company in its sale. The business was lean, with just three full-time employees besides the owner, and the owner’s wife handling administrative duties. The biggest challenge was that the owner was the business; he managed every client relationship personally and spent over 50 hours a week quoting projects, performing technical work, and communicating with customers.

When we put the business on the market, there was a good deal of initial interest. Unfortunately, once the buyers came to understand that the owner was the business, their interest dwindled. After all, if all the customers rely on the owner, call his cell phone with questions about products, services, and billing, then what happens when he’s no longer there? It was simply too risky for most buyers.

At the end of the day, the business was sold for 60% of what he hoped for and a job. The job was a requirement because the owner was necessary to transition the goodwill of the customer relationships.

How many businesses do you know that run this way?

How much longer do you want to work after you retire?

If you continue to maintain all of your customer relationships, it’s going to be a long time before you can.

Now you know what will happen when those owners want to sell. It will be a tough road, and they will have to take (much) less than they wanted.

A lack of consistent revenue stream

This is also related to owner dependency. Business buyers want to be able to expect that the company will continue making revenue into the future before they invest their own money into it. Are the contracts the business has with its customers in force? How is revenue made: is it point of sale only, or are there future contacts scheduled for service or upgrading? The business needs to both make money and continue to make money to be attractive to buyers.

Calder sold an amazing little manufacturing business that sold unique machines to a niche audience. The owner had contracts in place with machine designers. The owner also had a customer base that was always interested in the next model. The designers would submit prototypes; the company would take care of marketing, manufacturing, fulfillment, and customer support.

What was so interesting about the sale of this business is that the buyer had no prior experience building machines, had never worked in a small manufacturing business, and was an “outsider” in the niche. Yet he was still successful post-sale! This is because the previous owner had spent time building a subscription-model company, writing down instructions, and training a manager so that he could spend a good portion of this time working on personal projects. Revenue was growing and predictable! It made all the difference in the world.

It is important to note that during the marketing of this business, we obtained eight solid letters of intent and favorably negotiated a solid price and terms due to the profitability and marketability of the company.

Limiting potential buyers

When business owners choose to self-represent in a business sale, they rarely realize how much value they’re losing out on. Without a structured, competitive process, buyers have no reason to stretch on price or terms. A study by Axial, a leading private deal network for North American lower middle market companies, shines a light on this subject. They found that by hiring a reputable M&A advisor, such as Calder Capital, sellers obtain a premium on their valuation, EBITDA multiple, and ultimately, on average, obtain a 25% to 37% gain in sales price. By running a disciplined, confidential sales process and engaging a broad universe of qualified buyers, Calder creates real competition, credibility, and urgency. The result is not only more interest, it’s also higher multiples, stronger terms, and transaction certainty. In the market, a premium typically comes from forcing many buyers to compete. This is how sellers garner a larger payout and how experienced M&A advisors are worth more than their fee.

A good M&A Advisor maintains a long list of potential buyers to market a business to. Often, business owners wish to shelter pertinent information from competitors for fear it will be used against them in the marketplace; however, ignoring strategic buyers as potential buyers can limit opportunities for sale.

While people do sometimes buy into a business with no relevant industry experience, strategic buyers are already invested and interested, and should not be sidelined. There are ways to discreetly inform potential buyers about the overall robustness of a business model without giving away too much proprietary information, and a good M&A Advisor can help with this.

A great example of this involves a company that we sold a few years ago. The owner did not want to approach strategic buyers for fear of allowing the competition to see “inside” his company; additionally, he did not want a buyer to consolidate his company and put his employees’ jobs on the line. We obeyed his wishes by not directly contacting strategic buyers or companies that operated in his field.

Interestingly, we were approached via a private equity company that owned a platform company, which would have been a match. After meeting with the management team of this platform company, our client realized that they would be a fantastic synergistic buyer, one with the ability to offer a whole new set of products to his customers. Now, despite this forming relationship, the buyer still had to compete with other very interested parties. At the end of the day, the private equity-owned strategic company made the highest offer (in cash) and closed the transaction in 45 days. Moral of the story: stay open-minded. You NEVER know who the right buyer is.

Conclusion

When you are planning to sell your company, it is very important to consider not only how you run your company day-to-day, but also who you will allow your company to be marketed to. The more independent a company is from the owner’s oversight, the stronger the product/customer relationship. Also, the wider net you allow your M&A Advisor to cast, the more successful you will be during the transaction process.

So, ask yourself: would you rather “retire” with 50% of what you planned for and a 2-year employment agreement, or would you rather walk away with 100% in cash and a 3-month consulting agreement? These considerations are just the tip of the iceberg on how to make the most favorable option occur for you.

Questions on the business-for-sale process? Contact Calder Capital using the form below!

About Calder Capital:

Founded in 2013, Calder Capital is a cross-industry mergers and acquisitions advisory firm with offices across the United States. Calder provides valuation, sell-side, and buy-side services. We are nationally recognized for excellence in advising $1-100M enterprise value transactions in manufacturing, construction, distribution, and business services. Calder serves business owners, entrepreneurs, family offices, financial buyers, and investors. Learn more at www.CalderGR.com.