Why Some Businesses Don’t Sell
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 percent.
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- 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 a business acquistion.
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- The economics of the deal are not doable, and the seller is unwilling to negotiate on the terms of the deal structure or the price.
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- There was serious interest from prospective buyers, but the owner got distracted by friends or other associates who were considering buying the business or knew someone who might be interested. None came through.
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- A contract agreement was made to buy the business, but financing was impossible to find. If a business does not have verifyable 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.
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- The buyer couldn’t get financing. Not only the business must 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.
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.
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- Have up-to-date financial information available
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- Maintain normal business hours
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- Set a realistic price
Here are two major ways to increase the odds that your business will be the one in five 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.
The Perfect Business
While there is no perfect business, the one that would be most likely to sell, has the following attributes:
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- A reasonable price
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- A reasonable down payment (hopefully 40 percent of the full price or less)
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- Seller financing
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- Reasonable gross revenues (ideally increasing each year)
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- Seller earnings of $60,000 or more
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- A compelling reason for sale
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- A desired or popular industry type
- Attractive and strategic location (if important for business type)