We’ve discussed previously why business owners have less success selling their businesses themselves, but even with proper positioning and marketing some businesses will never sell. There are a number of reasons for those failures, and here I have laid out the Top 5 Reasons That Businesses Do Not Sell:
1. The Unicorn Hunter
Generally, most quality business intermediaries help prospective clients to understand how buyers are likely to value their company and how the deal will be structured prior to going to market. This is a best practice to avoid client surprise, disappointment, and potentially hundreds of hours of wasted time. Calder will always provide a prospective client with a likely range of value for their company along with factors that influence the range and data supporting the why we reached our conclusions. Despite this, we occasionally come across the “unicorn hunter”.
So what is a unicorn hunter? We would define a unicorn hunter as a seller who, despite honest and data-driven advice on likely business valuation, firmly believes that a unique or “unicorn” buyer will emerge who offers to pay a vast premium for their company. 95% percent of the time we caution against this because business buyers are almost universally successful and intelligent people that do not overpay for companies. After all, they have acquired the capital and knowledge necessary to purchase and operate a business. Usually they have prior business management experience and are financially astute. Generally, they seek out the counsel of CPAS or other advisors prior to making major financial decisions, and therefore the process they use to acquire a business is practical and based on the sound advice of advisors.
Of course there are exceptions, and the stories about these exceptions are frequently and widely distributed, leading sellers to believe often in an exaggerated way that a “dumb buyer” with dumb money will emerge offering a ridiculous premium. These type of buyers are labeled “unicorns” because they are mythical. Buyers will seek advice on valuation from professionals, their banks will conduct due diligence, they will research multiples on the Internet and they will require an acceptable level of return on investment. For these reasons, it is generally extremely unlikely that a buyer will significantly overpay for a company.
But what about that other five percent? While we have found that the limited auction style model of selling a business is beneficial for all business owners, it is particularly beneficial for a consistently growing business with strong cash flow and limited owner involvement. In this instance, it is typical to obtain 5+ offers and bid up the price and terms to a level that may exceed conventional valuation metrics. The eventual buyer oftentimes recognizes unique synergies or exceptional growth opportunities and is willing to outbid others to obtain the business. If we believe that your company is a contender for multiple offers and premium pricing we will advise you as such prior to going to market.
2. No Plan B
We have found that it is important, particularly in the case of pre-retirement age sellers, that the seller has a good idea of what they will do following the sale of their business. More than once we have encountered instances where we will take a business to market and obtain offer(s) in the valuation realm initially discussed, only to have our client decide to take the business off the market and continue to operate it. Why? The owners will say:
- I don’t have any hobbies. My business is all I know.
- I haven’t found another business. Or, my other venture is not going as expected.
- Through this process my business has markedly improved; or I’ve fallen back in love with my business.
3. Sale Proceeds Not Enough
We always encourage our prospective clients to discuss their company’s likely value and net proceeds with their CPA and/or wealth advisor. Naturally, we do not want to go down the road of selling if the likely offers will not be enough to satisfy the long term needs of our clients.
Despite this, infrequently we will go down the road of receiving offers from buyers only to have our client decide at the 11th hour that the proceeds will not be enough and that they will need a specific additional amount of money in order to do the deal. Generally, the additional amount required will not be achievable, and we will be forced to put the engagement on hold or cancel it altogether.
4. Business Deteriorating
Twice in the past year we have taken on engagements with clients whose businesses ended up deteriorating rapidly, and such that despite significant interest from buyers, no transaction could be consummated. The first was a business tied to the oil & gas industry. The company’s sales dropped 75% in one year and significant profits turned into significant losses. We believe that this company is salable once things stabilize, however now buyers continue to believe that they would be catching a falling knife.
Secondly, we engaged a niche manufacturing company where one of the owners had recently passed away. Despite there being other active owners, it turned out that this particular owner retained most of the manufacturing operations knowledge. Despite multiple offers and going under contract twice, continued mismanagement and lack of communication from the sellers caused the buyers to back out and shortly afterward the business became insolvent.
5. Buying a Job
Perhaps amongst the most common, this reason will be the bane of many small businesses as Baby Boomers pursue retirement at an accelerating rate: the fact that most small businesses are marginally profitable and require the intimate involvement of the owner. More specifically, it is challenging to sell companies where the owner works 35+hours per week and the discretionary earnings of the company are less than $150,000 per year.
Why is this? There are a number of reasons:
- Many buyers are seeking businesses that are relatively owner-independent, meaning that there are managers and/or procedures in place by which parts of the business operate autonomously or independently from the owner’s oversight.
- Buyers who wish to become owner-operators generally desire to make a minimum of $75,000/year. If the seller’s discretionary earnings (SDE) of a business are less than $150k, after the owner pays themselves $75k, payroll taxes and invests in opportunities for growth, there is simply not much left over for debt service. Banks will take this into consideration when financing a business acquisition. Debt serviceability drives willingness/ability to finance and therefore valuation from any lender’s perspective. And because money is presently inexpensive, the vast majority of buyers are seeking financing partners to consummate transactions.
- Oftentimes would-be buyers are presently working at jobs where they are making six figures. These jobs, while perhaps monotonous and undesirable in many respects, offer predictable raises, extended vacation and benefits that are simply not a reality for a small business owner. These buyers will simply not take the risk of ownership where they cannot clearly identify that the potential rewards outweigh the risks.
- There are numerous high-cash-flow, less owner dependent opportunities available. Buyers will navigate to these first.
As you can see, it is important to seek out the counsel of advisors prior to selling a business and it’s even more important to make sure that you are realistic in your expectations. It’s important for sellers to view their companies as buyers will. This will keep their expectations in line with reality and even help them to make changes that will better position their companies for sale.
Please feel free to contact Calder if you have questions or would like to comment on your experience.