How Many Businesses Sell?
The short answer may seem trite but it’s true: “every business that does not fail will eventually change hands”. Admittedly, the transaction might not be by choice. It might be the result of the owner’s death or disability. It might be that multiple owners can no longer get along. It might be a divorce. But at some point, every one will change hands.
But the real question is how many businesses that are put up for sale – that are listed by a business broker, a realtor agent or offered directly by the owner (so-called FSBOs; “For Sale By Owner”) – actually sell?
But we can’t answer that question without a little analysis and clarification because the number of businesses that sell – as a percentage of those put up for sale – varies by business size.
Let me start by saying that properly-priced businesses will nearly always sell. The key part of that statement is “properly-priced”. That said, here are some statistics.
- About 80% of businesses in the United States with employees have revenue of $1 million or less. We classify these as Main Street businesses. This is a big market and generally where business brokers start their professional career. But only one out of every 5.5 businesses in the Main Street market – a little less than 20% – actually sells. (But remember, these numbers include businesses listed by realtors and FSBOs; and owners are notorious for having an exaggerated opinion of their business’ value and that real estate agents rarely have any idea how to value and market a business.)
- Roughly 19% of the businesses in the U.S. with employees have revenue of between $1 million and $100 million and between 10 and 100 employees. We focus on those with revenue of between $1 million and $30 million. Roughly one in 3.5 – about 30% – of these businesses sell.
- In the category of the largest businesses – those with revenue of $30 million or more – the odds improve. One in three of these businesses sell.
So, from this data, we can see that the bigger the business, the more likely it is to sell.
How About LISTED Businesses?
The numbers stated above included all businesses that owners wanted sell, not just those listed with some type of broker. So, how many listed business sell?
Well, first, let’s consider who the businesses are listed with.
Though people are becoming more and more aware that professional business brokers exist and are a resource that can be tapped into, there are still many owners that will “list” their business with a real estate agent. There are others that will tell their accountant or attorney that they’d like to sell in the hope that one of those advisors knows somebody that might be interested. (Talk about minimal exposure, eh?)
As I’ve said repeatedly to business owners, business brokers and professionals who have taken our course over the years, asking a real estate agent to sell your business is like asking a dentist to do your knee replacement. This is guaranteed to be an exercise in frustration.
Let’s Prove the Point
For example, there is a convenience store/gas station near one of our offices that is listed for sale with a real estate agent. Because we’ve marketed and sold a number of similar businesses over the years and, as a result, have a large list of potential buyers for such opportunities, I called the agent to get the details.
It was no surprise to learn that the agent didn’t have any.
I then asked how the price was arrived at. “The seller”, with the agent’s assistance, “…pulled it out of his ear.” I kid you not. And the agent listed the business anyway! That business has been “on the market” for more than two years.
If you’ve been reading this blog for any period of time, you’ve read many examples of how businesses listed with realtors never sell. That explains some significant proportion of the high percentages of “never solds”.
Why Don’t More Businesses Sell?
There is a ton of reasons businesses don’t sell. As I mention in the video that opens this post, I’m at the annual International Business Brokers Association conference in Orlando, Florida. Yesterday, I was part of a group of about 30 brokers that listed some of the reasons businesses don’t sell. Here’s a list of of some of them:
|• Price is too high (the BIG one!)||• Books are a mess|
|• Geography (too remote or dangerous)||• Business obsolescence|
|• Environmental and legal issues||• Unethical sellers (they’re out there!)|
|• Poor broker representation||• Seller remorse (no plan for what’s next)|
|• Seller changes price/terms||• Customer concentration|
|• Represented by a realtor (DUH!)||• Financing|
|• Attorneys (notorious for screwing up deals)||• Inexperienced advisors (the wrong attorney)|
Some of these reasons you can control or impact. Here are a few:
- Customer concentration – Identifying this issue to the seller and suggesting that he broaden his customer list is a must. If two customers – for instance, Walmart, Target or Carrefour – make up 80% of the business’ sales, the risk to the business is significant if one of these customers starts buying elsewhere. This heightens the risk for the buyer. Explain how this condition will have a serious impact on value and that he spend a year or two to become more diversified.
- Financing – Economic conditions at the time you bring a business to market will have a big impact on the availability of financing – and, thus, the ability to find a buyer. As I’ve written before, there is a ton of money out there looking for businesses to buy and a ton of lenders and equity investors looking to lend and invest. Using any of the SBA lenders that we recommend, you can pre-qualify the business for SBA-guaranteed financing. You can also tap into our network of financing sources. Unless the business is a disaster or the buyer has the proverbial “checkered past”, financing in a normal market should not hold up a properly-structured deal for a properly-priced business. Besides, a motivated seller will almost always step in to provide financing, especially to close a gap.
- Books are a mess – This happens all the time in the Main Street market and more often than we’d like in the lower Middle Market. Advise your client to hire an accountant or bookkeeper to get the books cleaned up.
- Price – This is where you have control over how many of your business listings sell.
Our course, The Basic “How-To” of Becoming a Business Broker”, teaches how to become a professional business broker including how to value businesses and handle inventory.
Become a Professional Business Broker…
Price: The Ultimate Selling Tool
Memorize this: The only reason something – ANYthing – a house, a car, a pair of skis or a pound of tomatoes – doesn’t sell is that the price is too high. This has been true from time immemorial and it will remain true in any free market. In our experience it is, by far, the major reason that businesses don’t sell.
But when you have people with no knowledge or training or experience in the business of valuing and pricing businesses, how could it be otherwise? Sellers don’t know what they’re doing; realtors don’t know what they’re doing; other professionals don’t know what they’re doing. When it comes to pricing, even many business brokers don’t know what they’re doing! No one that has not been schooled in how to value a business should be even remotely close to the effort – unless it is to run out for coffee and donuts to fuel the pros.
Yes, this mob of the untrained and uneducated is not without broker representation, unfortunately. A lot of self-proclaimed business brokers don’t know what the heck they’re doing, either. And there are enough of them doing it to taint the rest of us. Such “brokers” – those who never bothered to get any training – ask the seller what he wants and lists the business at that number, regardless of the business’ value.
Add this to the realtors, the FSBOs and accountant/attorneys and now you can see why most businesses don’t sell.
If we eliminate the FSBOs; if we eliminate the businesses listed by realtors and the other untrained professionals; and if we eliminate the businesses listed by brokers who will list anything – if we look only at businesses listed by professionals that know what they’re doing, that properly valued their listings – I suspect that the percentage of listings that are sold by trained, professional business brokers is much higher than the statistics mentioned at the top of this post.
The Bottom Line
Lousy books, divorce attorneys (rather than transaction attorneys), real estate agents, legal issues and all the rest, can be problems, yes; but many times such problems can be overcome by addressing the price.
A business broker MUST do a valuation – or, for larger businesses, hire a company that specializes in business valuations or appraisals. But even if you do a valuation, some sellers will tell you that, “I need more than that.” You need to realize that the higher the price is above the actual value, the less likely the business will sell – and if you take that listing, it will be one of the many that don’t sell.
If you’ve been reading this blog for a while, you know that we’ve been through some valuation issues with some sellers. Our solution? We – and many other professional brokers – do not take any listing assignment that we feel won’t sell. That means that the closing rate of such professional brokers is much higher than the overall numbers shown at the beginning of this post. If you want to become a business broker, become one of these.
If you want to be a successful broker, you MUST value any business you’re asked to list and be willing to walk away from the listing if the price the seller wants is so far above the business’ value that it is unlikely to sell. It’s simple: take what you can sell.
Our time is valuable and important to us. Take listings you can sell. The listing price is where this consideration starts.
If you have any questions, comments or feedback on this topic – or any topic related to business – I want to hear from you. Put them in the Comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a profitable week!
#business #businessacquisition #sellabusiness #becomeabusinessbroker #businessbrokering #businessvaluation #MergersandAcquisitions