by Max Friar
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 most cases, these sales will not materialize. By some estimates, perhaps only five percent 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 business broker, someone who is paid to take a good hard look at the business and make the changes necessary for the sale.
As any experienced broker will tell you, there are a number of reasons businesses fail to sell. Personally, I’ve seen businesses stubbornly fail to move for many reasons, but the most critical are:
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 problem is, without these owners, the businesses cannot operate well or at all, and any savvy buyer will understand that when he begins to ask 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. I talk about this extensively here.
A few years ago, I sold a small IT service company. The owner was hoping to achieve a sale price of $175,000, which at first seems very modest. There was one employee besides and owner and the owner’s wife took care of administrative tasks. The main issue was that the owner maintained all of the customer relationships and spent 40+ hours per week working on projects, quoting and working 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, billing, etc, 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 sold for $45,000 and a job. The job was requisite because the owner was necessary in order to transition the goodwill of the customer relationships.
How many businesses to you know that run this way? How much longer do you want to work after you retire? If you have all of the customer relationships, it’s going to be a long time. 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 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 be making money and to continue to make money to be attractive to buyers.
In 2012, I sold an amazing little manufacturing business that sold little machines to a niche audience. The owner had contracts in place with machine designers and 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 is so very 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 four letters of intent and negotiated a solid price and terms due to the profitability and marketability of the company.
Limiting potential buyers
A good business broker can help to create a longer list of potentials 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, but ignoring competitors as potential buyers can limit opportunities for sale. While people do sometimes buy into a business with no previous experience, competitors 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 broker can help with this.
A great example of this involves a company that I sold in 2013. 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 competitors or companies that played in his field. Interestingly, we were approached via a private equity company who owned a strategic platform company. After meeting with the management of this 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, the buyer still had to compete with other very interested parties. At the end of the day the strategic buyer made the highest offer (in cash) and closed the transaction in 30 days. Stay open-minded. You NEVER know who the right buyer is.
To conclude, 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 and the wider net you allow your broker to cast, the more successful you will be during the transaction process.
So, ask yourself: would you rather “retire” with $45,000 and a 3-year employment agreement or walk away with $3,500,000 in cash and with no further responsibilities? Now you know what you have to do to make this happen.
Please feel free to contact Calder Capital with your questions on the business-for-sale process:
Max Friar is Managing Partner of Calder Capital, LLC, a Grand Rapids, MI-based mergers and acquisitions firm. Max is passionate about helping to educate and guide business owners about and through the business-for-sale process. He specializes in transactions ranging in size from $500,000 to $5,000,000.