Continuing from our last posting, here are 6 more common reasons businesses don’t sell or struggle, unnecessarily through the process.
- Decreasing revenues. The majority of buyers are seeking profitable businesses with year-over-year increasing revenue and profits. When a business has an inconsistent record with varying results or possibly declining revenue and/or profits, complications with the business sale are likely to occur. While buyers traditionally purchase businesses based on anticipated future performance, they will value the business on its historical earnings with the major focus on the prior 3 years. All too often, a seller decides to sell when the business is declining, even though short term. The best time to sell is when the business is at its best (not just a spike in revenues but a result of real growth).
- Inaccurate Books. One of the most critical components to a successful business sale is for the business to maintain accurate, detailed, and clean financial statements that match the filed tax returns. Clean means not running personal expenses through the business to lower tax liability. Buyers, and much less lenders, will not give you credit for those expenses. Many times, business owners take advantage of tax laws and live in the gray or even red areas. They do that to keep more money at the beginning to run their business. If that’s true for you, stop that practice 3 years in advance of sale. For every dollar you save on taxes, you can gain two to 3 dollars on sale.
- Customer concentration. Lenders and buyers never want to see one client making up more than about 20%-25% of revenues. It is important for a business owner to recognize that a business which lacks a broad and diverse base of customers possesses a higher degree of risk for a buyer as the loss of any one of these large clients could have a material impact on the future earnings.
- The owner is the business. This is called “All about Bob”, where the owner is not only the face of the business but also deeply involved with all facets of the company – sales, marketing, operations, management, and financial. The larger the company, usually, the less likely this is true. But some businesses have rocketed growth and the founder is still the only executive in the business. This is true, especially in Silicon Valley. My advice is to plan your exit by finding good managers and executives and step away from the business. Let them grow it for you.
- Aging. The owner has waited too long to exit the business. Maybe he or she thought children would take over. These days, this is not very common. Becoming tired and lacking the previous ‘fire in the belly’ has a way of spilling over into the business fundamentals. An owner who has become burnt out almost unavoidably transmits their lack of drive to their staff and clients in a number of subtle ways. The net result is the company’s performance slowly begins to deteriorate.
- Sunset. The outlook for a given industry will have a direct impact on the valuation and marketability of the business during a sale. Businesses facing obsolescence or mired in a shrinking industry will face an uphill battle when it comes time to selling the company.
These are not the only reasons businesses don’t sell but are some of the most common reasons, most of which are correctable. Those that could be a continuing problem are those that cannot be changed at the time of sale. Now, if an owner was willing and able to extend the date to market the business, most of these issues can be corrected or mitigated. If that is not possible, then consider well how to match the value of your business with what buyers are likely to consider and take that the strain out of process. Selling a business is a monumental task and can be a great source of stress, even when it goes smoothly. Being prepared and knowing the facts can help you focus on the good.
Click here to see the first list of reasons.
Please feel free to contact us if you have any questions or would like a confidential consultation. -John Young [email protected]
Sunbelt also handles Mergers and Acquisitions