3 Reasons Why Some Businesses Never Sell
According to the largest business sales network in the US, “Only 30% of listed businesses will actually get sold.” Practically speaking, this means that out of today’s 45,000 US-listed businesses, only 13,500 will actually end with business owners being paid and ownership being transferred to a new owner.* What makes the whopping 31,500 businesses unsalable?
There are over 800 business brokers in our network. Last month, our team was awarded the Presidential Award for excellence in business sales, our deals completed, and the enthusiastic support and coaching of other brokerage firms. Transworld Business Advisors is located in 16 different countries and has been selling business worldwide since 1979. This award was humbling for our North Carolina team. The bottom line… We know a thing or two about ACTUALLY getting businesses SOLD!
1. Unrealistic Expectations of Business Owners
Every business industry has “industry standards” or “Rules That Apply” within that specific industry. Industries like construction, require permitting, Accounting requires state and federal oversight, Food & Agriculture require intense USDA Regulations, and Real Estate uses comps, appraisals, and independent inspections in order to pass lending requirements for closing.
If an inexperienced business owner wants to randomly set a listing sales price based on a “gut feeling” or some other random guesstimate, it is unlikely that their business will sell. Business lenders like the SBA use complex formulas from decades of experience to determine if a business meets its requirements.* Two factors that will be examined are the business's ability to service the debt and its ability to provide a livable wage for the new owner. Unrealistic expectations create elevated listing prices that prevent a business from being sold.
We recently worked with a couple that wanted to sell their business from another state. This couple has owned their business for 20+ years and they have worked really hard to build a great business. Unfortunately, throughout the business valuation, the husband kept mentioning that he had a “magical number” that he thought their business was worth. Once the valuation was completed, his “magical number” was five times the actual valuation. The industry COMPS of “sold businesses” for their industry and what the SBA would lend were nowhere close to his truly “magical number.”
Andy Cagnetta has said that if a business goes to market only over-priced by 15%, this business reduces its odds of selling by 90%. The number one reason that businesses never sell is simply that they are overpriced in the market.
Remember these two things if you are wanting to sell your business:A) Your business will compete against 45,000 other businesses in today’s market if it is listed to sell.
B) What is your goal? Think hard about your answer and ask this question, "Do I want to simply list my business, or do I really want to sell it?”
If you want your business to sell then you must price it right on the market.*
2. Underestimating the Complexity of a Business Transaction
In one of our last business sales, we had 30 attorneys that attended our final closing Zoom meeting to approve final documents. While this was a larger deal, the complexities of getting to the closing table are very similar because the same steps and processes are in place.
Accurate Valuation, Confidential Marketing, Vetting Buyers, Buyer/Seller Meetings, Offers Negotiated, Due Diligence, Lending, Legal & Accounting, Real Estate/Landlords, Inventory & Works in Progress, Closing, and Training of New Owner.
While the processes are typically the same, the players involved to get to closing always change. With every deal, we typically work with new business owners (sellers), buyers, attorneys, CPAs/accountants, lenders, and landlords. So with every deal, we close we work with a new variety of TYPE A PERSONALITIES. In most instances, these individuals are seldomly told what to do and given time constraints in which to operate.
Most of these folks are not deal makers. These individuals for the most part tell others what to do and they have done this, successfully for a long time and not you are going to bring all of these players around the table in hopes that they can all “play ball” and get along through intense periods of prolonged negotiations.
Here is really when business transactions get tough. Then you throw in the complexity of the deal, and the difficulty of the people you are working with, and now add the element of human emotion that we ALL were given by our creator.
For all the folks aforementioned, none of them are exclusively working on this one deal on a daily bases. The business owner has to continue to grow their business and all the other folks listed have a multitude of clients and projects that they are working on. A business deal has to be tended to daily and even hourly if there is any chance of it getting closed. Without an experienced business broker holding your deal together on a daily basis, your chances of selling your business are next to nothing.*
3. Due Diligence Issues
Imagine that it is Christmas morning and you have waited until the last moment to put your son or daughter’s bike together. When you open the box you are met with the unpleasant surprise that the manufacturer put instructions in your box for building a grill. To further exacerbate the issue, imagine that 40% of the parts are missing to complete the build (or business deal).
When someone buys a business they want to make sure that the financial representation given about the business is truthful and reliable.
You will know that you have contacted the right business broker (A broker that gets deals closed) as they will begin collecting correct information from you on day one. These brokers instinctively know that every business transaction ends up in due diligence and if this is the case 100% of the time, they must collect supporting documents immediately and consistently throughout the listing process. Some businesses take months to get listed due to the fact that so much information has to be collected, organized, and substantiated.
100% of businesses that get sold are allowed time for due diligence. Can the buyer, their attorneys, and accountants verify that everything you have said about your business is accurate? Due diligence could last two weeks or two months depending on the size of your business. With larger deals, a weekly zoom call is set up by your business broker for the buyer to ask further questions of the seller. More than anything, this weekly meeting keeps the buyer and seller on the same page and it also ensures that the deal is moving along in a timely manner.
The vast majority of businesses sold include lending which is primarily handled through the SBA. Typically during due diligence, the process of lending begins. SBA lending has been compared to the two pedals of a bike in order for it to move forward. The SBA’s process brings the business's past financial performance into focus while simultaneously vetting the buyer of the business. Does the buyer have the financial means and the work experience for them to have confidence in lending to this individual? This is but another reason that an experienced broker will be working with you and your accounts to make sure that your business is represented accurately.
What about the CASH in my business that may not show up on my books? How is that handled during due diligence? Have you ever heard the old adage that you can’t beat Uncle Sam twice? If you wish for this money to magically reappear you will need to work with your accountant to refill your taxes for the years required.
Conclusion: 3 Reasons Why Some Businesses Never Sell
Obviously, this article wasn’t written as the definitive work on why some businesses never sell. That article would have included 500 reasons why some businesses never sell and would have made for a bit of a lengthy read.
The reason that we focused on these three reasons is that we believe the reasons make up 95% of the cases for why businesses listed today never sell. Unrealistic expectations, underestimating the complexity of a business transaction and due diligence issues are far and away what keep most businesses from never selling.
If you are considering the sale of your business please do not hesitate to contact me. My team sells North Carolina’s largest and most profitable businesses and we have a heart for every small business owner. You can reach me directly at 919.605.2854. I look forward to meeting you and learning more about the incredible business that you have built!