Having worked with business owners for many years, we have sometimes found ourselves in the unfortunate position of having to explain to them why their business won’t sell. Selling your business is an emotional process because you’ve spent years nurturing business relationships and operations before finally deciding to sell. Approaching a transaction with unrealistic expectations, poorly kept financial statements, overly concentrated business operations, and no transition plan can unwind the value you’ve labored so long to build.
Top Reasons Your Business Won’t Sell
#1 You’re Harboring Unrealistic Value Expectations
Companies are bought based on the value that can be transferred to their new owners. Due to the emotional attachment owners have to their business, it’s not uncommon to find that their perception of its value exceeds the true market value. When a buyer values your company, they assess it primarily by the cash flows that the business can generate now and in the future. This is not to say that the hard work you have put into your company goes unnoticed. After all, the decisions you’ve made and the culture you’ve built have created your company’s cash flows today.
Bridging the valuation gap between owner and buyer expectations can be difficult. An experienced buyer understands how to value your business. It is important to understand that most buyers have done multiple transactions, whereas you may be selling just one company in your lifetime. If your expectations are too high, you won’t be able to come to terms. But if you approach the transaction process by trying to walk in the buyer’s shoes, it will expedite the sale and facilitate a strong working relationship between the two of you. Keep in mind that, while you’ve perhaps had all along some idea of value for gifting and estate purposes, a valuation for your company’s sale will very likely be quite different.
#2 You Have Poorly Kept Financial Statements
Having disorganized, inaccurate or incomplete financial statements is one of the quickest ways to scare off buyers. Buyers want to know what their money will be getting them, and they don’t want to waste their time. When they see poor financials, it tells them that they are in for a lengthy transaction process filled with uncertainties. A lack of detailed financials also points to the likelihood that the owner doesn’t understand the business well and, consequently, has a radically unrealistic idea of the company’s value. Poor financials limit your thinking just as much as they dissuade a potential buyer because you don’t know the true health of your business. Well organized and accurate financials help identify weaknesses in your operations, guard against embezzlement, and track your company’s present and future growth. It’s critical that you keep detailed financial records to paint a clear picture of your company’s performance and assure potential buyers of the value they will be receiving.
#3 Your Business Operations Are Too Concentrated
Customer and supplier concentration is another key reason why your company will not sell. Too much reliance on a few customers and suppliers means that your business operations may lack a stable path for future performance. Imagine if your biggest customer left you for your competitor tomorrow. How would this affect your business profits? If it would be a big blow to the business, you probably rely too much on that customer. Then imagine if your biggest supplier raised prices by 10% and ask yourself the same question. Too much dependence on a handful of customers and suppliers is a key valuation metric for potential buyers for this reason. With the changes that occur from a transaction, your company won’t sell if buyers think that a few lost customers or vendors will fundamentally change the business’s profits.
Diversifying your customers and suppliers as much as possible will show buyers that your business performance is resilient and will continue post-transaction. Start by working to grow your customer base and be sure to work equally hard on customer retention. Long-term customers are valuable to your business because they represent reliable income for the company, and their positive reviews help attract other customers in the process.
Continuing to develop relationships with new and existing suppliers is just as critical. Business owners often feel comfortable using suppliers who have successfully met their needs in the past. Why fix something that isn’t broken? But when a buyer purchases your company, they are looking to grow the business. If your current supplier(s) cannot expand with the new business’s growth trajectory, buyers will question your business’s future value. Growth potential can be significantly hindered by a lack of available resources, which is why you must diversify your supplier relationships in addition to your customers.
#4 You Have no Transition Plan
In a transaction, the loss of knowledge during the ownership transition can be detrimental to a buyer’s perception of value. Your company may have run well up to this point due to a strong and experienced management team, but will it continue to run as effectively if or when that team leaves the company? Buyers care about the path forward after the sale. In a survey done by the Exit Planners Institute, 83% of business owners surveyed did not have a transition plan for management (49%) or have a “plan” that has not been documented or communicated (34%). If you cannot provide buyers with a clear plan on how the business will operate without you, then your company will not sell for the value that it could.
When a business relies heavily on a single person, most often the owner, buyers must determine how company value will change if that key person is not involved anymore. Your company will be more attractive if you can demonstrate management depth. Having an experienced management team shows buyers that the company can continue operations as they are for the long haul. Many times, owners stay on after the transaction to ensure effective transfer of knowledge to the new owners. Buyers are responsible for the growth of the business after you leave, but your company’s transaction value assumes that the business will operate as expected in the meantime.
There could be many more reasons why your company doesn’t sell. The good news is that most of those reasons can be mitigated with proper planning, realistic expectations, and the hiring of an advisor who can help ensure that you get full value for your business.