What are the odds of your business actually selling once you have made the decision to sell?

Well, national statistics indicate that the odds of your business selling are only 25% to 30%.

What does this mean? 

To put it bluntly: if you are thinking of selling your business, you have, on an average, about a one in three to a one in five chance of it actually selling. This obviously begs the question: Why are the odds so poor? 

One would think that if you put your business on the market, it should sell in a reasonable length of time. 

At CBB, we work closely with you throughout the whole process. We have a track record of many successful deals, and the extensive experience and expertise of our staff mean you can let go of a lot of the stress associated with the process. We’d like to learn more about your business. Please contact us.

In this blog, we’ll take a closer look at some of the challenges of selling a business.

The Reasons Why Some Businesses Don’t Sell

Here are some reasons why some businesses don’t sell:

• The business asking price is too high: A buyer must be able to make a livable wage, make loan payments on the debt incurred from the purchase, and make a reasonable return on the investment. Lending institutions address these very same issues when analyzing the financeability of a business acquisition.
• The economics of the deal are not doable: In this case, the seller is unwilling to negotiate on the terms of the deal structure or the price.
• There was serious interest from prospective buyers, but the owner got distracted: This often happens when friends or other associates are considering buying the business or know someone who might be interested. This causes extensive problems when the deal doesn’t come through.
• A contract agreement was made to buy the business, but financing was impossible to find: If a business does not have verifiable financial records for at least three years that support the asking price, the business cannot obtain financing from a banking institution. If the seller is unwilling to provide finance terms, the business cannot be sold. At least 90% of all small business sales are financed in one way or another.
• The buyer couldn’t get financing: Not only must the business be loan worthy, the buyer must also be qualified for the loan. The deal dragged on for months but fell apart for lack of financing.

They say that timing is everything. Many business owners wait until the economy is down. Their own business is also paying the price for the slowdown, so they elect to sell.  Now they discover that the price they thought they could get for their business is not realistic in today’s market. Sellers should keep in mind that the best time to sell is when their business is doing well.

The Challenge of Obtaining Financing

One factor that emerges from the comments by business brokers above is the lack of financing. This would seem to indicate that the sellers wanted all cash, or, at least, a good portion of the selling price in cash. 

Three of the comments stated that the reason the deal didn’t go through was that “financing was impossible to find,” “the buyer couldn’t get financing,” and “fell apart for lack of financing.” The reasons that obtaining financing is so difficult are:

1. The business doesn’t qualify for financing
2. The buyer doesn’t qualify for financing, and, most importantly
3.  Most small businesses are not financeable.

If lenders are not interested in financing the sale of the business, there are only two choices: the buyer pays all cash or the seller finances the sale.

Tips For A More Timely Sale

• Have up-to-date financial information available

• Prepare a current list of fixtures & equipment

• Maintain normal business hours

• Spiff up the business

• Set a realistic price

• Be willing to negotiate
• Gather all of the information a buyer might like to review

How to Increase the Odds That Your Business Will Sell

Here are two major ways to increase the odds that your business will be the one that sells:

1. Make sure that you are serious before you put your business up for sale

 You should be willing to accept, within reason, what the marketplace is willing to pay. It’s not what you want for your business, or what your accountant says it’s worth – it’s what a buyer is willing to pay. 

Find out if the price you are asking is in the “ballpark” before you go to market. Your local business brokerage professional is a good place to start. He or she can tell you what similar businesses have sold for and what you might expect to receive if you sell now.

2. Be willing to finance part of the sale of your business 

Counting on the business selling for all cash or assuming that the business can be financed will most likely make your business one that doesn’t sell. By showing your willingness to assist in the financing, you reassure the buyer that you have confidence in the businesses’ ability to finance itself. 

Also, keep in mind that by financing the business you will be entitled to interest on the balance, thereby increasing the price you will receive. Following these guidelines and tips might not sell your business, but it will certainly increase the odds. Almost any business will sell under the right circumstances. 

If you are serious about selling, the first step would be to call a professional business broker. He or she can answer all of your questions about the selling process and what it takes to sell your business in your local current economic climate.

The Perfect Business

While there is no perfect business, the one that would be most likely to sell has the following attributes:

• A reasonable price

• A reasonable down payment (hopefully 40% of the full price or less)

• Seller financing

• Reasonable gross revenues (ideally increasing each year)

• Seller earnings of $60,000 or more

• A compelling reason for sale

• A desired or popular industry type
• Attractive and strategic location (if important for business type)

There is an old saying that goes something like this: “The worst day of working for yourself is better than the best day of working for someone else.”

Remember: Burying excessive personal expenses in the business financials can lower business value!

The most popular method of valuing a business uses a multiple of earnings over a period of years. Business owners should be aware of this while attempting to reduce the bottom line with personal expenses to minimize taxes. 

Though there are a number of deductions that may be added back to determine true cash flow, not all add-backs are considered legitimate by buyers or lenders. Being too aggressive in minimizing taxes today may cost a business owner big dollars at closing.

Clean, defensible financials are foundational, but they’re really just one piece of a much larger preparation checklist. The next post widens the lens from that single financial pitfall to the full set of moves an owner should make before taking a business to market. 

The 10-Do’s In Prepping Your Business To Go To Market

Are you a business owner at that stage in your life where you are contemplating the potential sale of your company? Undoubtedly you have thought about selling a time or two and truth be told, 100% of all business owners have thought about it from time to time. It’s perfectly normal to question why, when or how to sell your business. 

The main key to a successful sale is preparation. Keep in mind that whatever you put into the process is what you will get out of it.

Understanding the selling process and being prepared are the key indicators that will establish the tone of selling your business and help you be more comfortable when you are ready. The selling process is important and requires a huge amount of commitment. Selling your business needs to be a calculated decision based on many actors.

Therefore, when you are ready, recognizing “The 10 Do’s of Selling your Business” will position your company at the right place and help you understand the ins and outs of the process a bit better.

The 10 Do’s of Selling Your Business

1. Do…Ensure it’s the right time for you to sell your business and understand the reason behind your motives. 

While the purposes of selling are typically personal (retirement, ill health, death, divorce and burnout) other significant considerations, such as money, are generally involved as well. Selling your company is perhaps one of the most difficult decisions you will have to make, so just confirm your decision, and stand behind it.

2. Do…Meet with your team of trusted advisors. 

A meeting should be held with your business broker, exit planner, attorney, accountant, and other crucial team members that will play a huge role in gathering and preparing all necessary documents for your business broker. Your team of trusted advisors also needs time for preparation so they can effectively plan to assist you in the transaction.

3. Do…Housekeeping and maintain accurate books, records, and financials. 

Having up-to-date information on your company is not only a good practice, but it also presents your company in a more appealing manner to buyers. A general rule of thumb is to have a minimum of three to five years of tax returns, financial statements, and payroll history as well as detailed fixed asset lists including equipment and vehicles.

4. Do…Get a business valuation by a credited company/individual to place the proper value on your company. 

It is very difficult for a business owner to value their own company and obtain a fair and reasonable asking price. Having a third-party professional perform a business valuation takes out all biased views and truly establishes the best and highest asking price.

5. Do…Secure and uphold confidentiality. 

Pertinent information leaked out can be damaging during the selling process and can potentially harm your current business. Always ensure confidentiality is upheld by all parties involved.

6. Do…Continue to run your business daily. 

Carry on business as usual and don’t become so overly obsessed with the transaction that your attention deviates from the day-to-day demands, affecting employees, clients, sales, and ultimately costs and profits. Allow your business broker to do their job, so you can do yours. After all, that is why you invested in one.

7. Do…Have realistic expectations. 

Knowledge, understanding, and realistic expectations are the stepping stones to a smooth and successful sale. To become comfortable with the entire process, it’s good to know that it typically takes the majority of business owners six months to a year to sell their company. So timing and momentum facilitate clear goals and expectations.

8. Do…Stay involved and active with the entire process. 

Simply stated, know what is taking place at all times; after all, it is your company until it’s sold. Even if you are feeling tired and burnt-out, remaining active and involved reassures buyers that this one is worth looking at.

9. Do…Be flexible and anticipate buyer requests. 

Staying ahead of the game just might pay off this time. Expecting and organizing vital documentation that buyers may need, such as an appraisal on assets, lease copies or insurance information, will reduce the stress involved with the transaction. Being flexible doesn’t mean you have to disclose all data upfront; it simply means be prepared.

10. Do…Negotiate, not dictate. 

Don’t be the kind of seller who wants it all at closing, or who won’t accept last-minute addendums. Depend on your business broker and team of trusted advisors to assist with the negotiations. You’re comfortable holding all the cards, but you and your professional experts need to decide beforehand when “to hold” and when “to fold”; either way, do so in an agreeable manner.

Good preparation reduces the odds of something going wrong, but even well-prepared sellers can still trip over avoidable errors once the deal is actively in motion. The final post catalogs the specific missteps that most often derail sell-side M&A deals in practice. 

Avoid These Common Sell-Side M&A Mistakes

Selling a company is no small feat. It can be time-consuming and stressful. It demands meticulous planning, competent advice, and a keen understanding of the dynamics of negotiation and deal-making. CEOs and companies inexperienced in the M&A process commonly make mistakes that can undermine a deal, resulting in a less favorable price—or even kill the deal outright.

These are the most common mistakes. Avoid them at all costs if you want to get the most out of your deal:

• Having unrealistic expectations about the time and effort the deal will demand of you. Deal-making takes time and expertise.
• Not creating a competitive bidding process. You must make your business appealing to multiple buyers to drive up the price.
• Poorly crafted or nonexistent NDAs. Confidentiality is money when it comes to deal-making.
• An incomplete or nonexistent online data room. Buyers need ready access to key information to review for due diligence. If they can’t access this information, they may move on.
• Hiring the wrong lawyer. A generalist or your in-house attorney will likely lack the expertise to see the deal to completion. Work with an M&A expert or you’ll be at a marked disadvantage.
• Not negotiating the terms of engagement with your expert team. Compensation and other factors are up for negotiation. If you simply accept a contract at face value, you’ll get less favorable terms.
• Not working with expert advisors. You need a skilled M&A / Business Broker who can assist you in valuation, drawing up key documents, and negotiating the deal.
• Not understanding market comparables or your competition. Which businesses are truly comparable, and why? If you can’t answer this, you’ll be at a disadvantage at the negotiating table.
• No disclosure schedule. The complete disclosure schedule must be ready well in advance. This sets expectations and can act as a deal timeline.
• Incomplete records, books, or contracts. When due diligence slows, so too does momentum. This can tank the deal or lower valuation.
• Not negotiating a letter of intent. Many key deal terms can be negotiated ahead of time in the form of a letter of intent. This document protects all sides, and there’s no reason not to have it.
• Failing to understand that wasted time is the enemy of every potential deal.
• Neither negotiating nor examining an acquisition agreement. The right acquisition agreement extends significant protections.
• Not allowing an experienced M&A advisor to take the lead in negotiations. You’re a novice. Your advisor is an expert. Lean on them.
• Not considering how the deal structure might weigh on tax issues.
• Neglecting daily operations while you try to manage the deal.
• Poor negotiation that doesn’t address long-term vision or cultural fit.
• Financial projections that aren’t rooted in reality.
• Not adding change of leadership provisions into key contracts. Consider also how the wording of current contracts may constrain your options.
• Not addressing employee issues, and failing to consider what steps will keep employees happy and on board.
• Failing to understand the power dynamics of negotiations.

It’s a lot to consider. For many business owners, it’s simply too much. This is why we advise always having a skilled, experienced M&A team in your corner. Anything less puts you at a disadvantage from the very beginning.

About Certified Business Brokers

Certified Business Brokers, established in 1974 with headquarters in Houston, Texas, is one of the pioneers of the business brokerage profession and is one of the oldest and largest business brokerage firms in the U.S. 

Having assisted thousands of owners in the sale of their businesses, our team of professionals has over 230 years of collective experience closing business transactions in excess of $1 billion in revenues. We work as a group to bring buyers and sellers together. 

Our referral base consists of a large network of transaction-experienced attorneys and accountants, financial planners, lenders who provide financing for business acquisitions, past satisfied clients and customers, industry suppliers, trade associations, and commercial real estate firms.

We’d love to learn more about how we can help you make a successful deal. Contact us for more information.