Top 4 Reasons Your Business Isn’t Selling
Whenever I engage with an owner interested in selling and learn about their business, I try to view it from a buyer’s perspective. First and foremost, buyers want to acquire a business that has an opportunity to grow and isn’t surrounded by risk.
In the U.S., there are many successful small businesses generating healthy profits that you would think would sell right away. Yet, oftentimes they don’t. Only about 25% of all U.S. small businesses that go to market actually sell; that means 75% of business owners trying to exit fail to make a sale. Why is that? There are multiple reasons a business doesn’t sell. I thought I’d share my top four:
Heavy Concentration
A business that is too reliant on a few customers and/or a few suppliers sends buyers running. This is probably one of the first things a buyer looks at, as do their lenders. Prior to closing, I’ve heard many buyers say they’re kept up at night by the fear of losing a major customer once they take over. Thanks to COVID and the supply chain issues we’ve seen recently, supplier concentration is a large concern, too.
As an owner, you never want to turn down business from a major customer, so you need to increase sales in other areas and/or find more customers. Ideally, you don’t want any one customer to provide more than 10-15% of sales.
You Have a Lifestyle Business
Your business has been successful as it has been a provider for your lifestyle. There is nothing wrong with that, only it may make it more difficult to sell. Buyers want to see a business that is ready to scale and increase profits. Your lifestyle business is very dependent on you as the owner. Many customers call you for orders. You also enjoy the many perks that you receive by having the business cover your personal expenses. I don’t know how many times I’ve toured a business warehouse to have the owner spend a lot of time on the tour showing us their personal toys they store such as boats or antique cars. The best way to remove yourself from your business is to set up processes where the employees run the business without a lot of management oversight/approval. That is what buyers want to see.
Dependent on a Few Key Employees
Key employees can kill a deal. Especially if one or two run the show. How your employee organizational chart is structured is right behind customer concentration as a risk factor. With the current labor market, you as an owner need to make sure you have happy employees that feel their input is valued and they are paid appropriately. You also want to hire from within so that new employees stick around as they see future opportunity. Having at least two people understand each job responsibility will help you avoid work slow downs when employees leave. Have a Standard Operating Procedure (SOP) in place and consider “stay bonuses” for key employees once you’ve decided to sell. If you can share with your buyer that your top key employees will be compensated by you for staying on for a year, will help close the transaction.
Financials
First off, you need to be making money, and lots of it to get top dollar for your business—which is why it’s advantageous to sell when you’re doing well. Yes, reputation, great employees, good customer base, popular products and/or services are all very important, but if your net income is low, you’ll have trouble selling your business.
How does your business get paid? Is your work project-based or recurring revenue with income coming in monthly on a consistent basis? The recurring model is golden and can ensure your business’s value is based on a multiple of revenue rather than a multiple of profits.
You will want to have a good bookkeeper and or CPA on your team to offer advice and provide financial reports as needed.
Most owners have a large percentage of their net worth tied up in their business. They are busy running the day-to-day operations and keeping their customers happy. Yet, to be in a position to successfully sell their business, owners need to think ahead and take some time to develop an exit strategy, ideally 3-5 years before they sell.
Hire a coach or exit planner to guide you in structuring your business so that it is ready to sell for top dollar when the time comes. If done correctly, you’ll be in that elite 25% of businesses that actually sell when they go to market.
This article was written by Sam Thompson, CBI, M&AMI. Sam is the president and founder of Transitions In Business, a Twin Cities based M&A firm that specializes in selling business to business and healthcare, transportation, manufacturing, distribution and construction/trade services companies. Sam is a Merger and Acquisition Master Intermediary (M&AMI) and a Certified Business Intermediary (CBI) who has successfully guided countless business owners through the sale or merger of their company. Prior to becoming a business broker, Sam was a successful CEO and business owner for 29 years before selling his $16 million conference and event management company. If you have questions about this article and would like to connect with Sam click on the link below.
