Selling a Business: 2 Major Obstacles
6 January 2025: Selling a Business: 2 Major Obstacles
Do you know how few businesses actual sell when they first come to market? Probably not. But the number is significant.
It’s a situation we discussed in depth in a post back in 2019 when we rattled off some statistics – as well as more than a dozen reasons why. The top three – price expectation, poor representation (generally defined as a real estate agent or the owner him- or herself) and lousy books and records – are probably pretty easy to intuit. And though many of the reasons keeping businesses from selling can be remedied – and when they are most businesses are likely to find a buyer – some of these reasons are more difficult – or even impossible – to address.
We’re working three deals right now that exhibit two of the most challenging and most difficult, if not impossible, reasons businesses won’t sell. One of them can be remedied with a drastic price reduction or a multi-year earn out. Another will require finding a buyer that fits the definition of a needle in a haystack. It may also require a price reduction to make finding that “needle” possible.
If you’re considering selling a business, you’ve got to know if yours is impacted by either of the following obstacles.
1) “Owner Concentration”
We posted about this phenomenon a few weeks ago.
Most brokers know the dangers of client or customer concentration, a condition in which a small number of clients are responsible for a significant percentage of the business’ revenue. However, owner concentration is not always understood by the business owner.
“Owner concentration” is a situation where the owner of the business produces a large share of the revenue. In the course of performing their due diligence, most buyers will realize that if the current owner – the seller – generates a significant amount of the business’ revenue and the business is valued based on that revenue and its resultant earnings, there is a serious risk to that revenue once the seller is gone.
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One of our offices is working on a deal right now that presents this exact situation. In this instance, the business is a service company doing between $2 million and $3 million in annual revenue. Based on the recast earnings approach, the estimated value of the business is about $1.45 million. But, as we teach in our courses, there are often adjustments that have to be made based on any unique conditions that might exist in any business. In this instance, the big adjustment had to be recognizing that the business owner was responsible for roughly 60% of the revenue – and that the owner’s departure would almost guaranty a reduction.
Any sentient buyer will, unsurprisingly, bridle at paying the nominal value when there is a strong chance that the business’ revenue – and thus its value – will fall precipitously should the current owner leave; and this owner was ready to get on with the next phase of their life. So what to do?
There are a couple of options when selling a business with this issue.
- Drop the price to reflect the value suggested by a reduction of revenue of “X”. Granted, X can be no more than a guess and one that will be argued about during negotiations with a buyer but making this adjustment certainly illustrates good will and the broker and owner a chance to negotiate an acceptable price.
- Prepare for and offer an earn out. Though this will require the seller to stay with the company for what, in this specific case, is likely to be at least a year and probably two, it will provide the seller the opportunity to hand over the reins gradually and validate the valuation. With regard to the subject business, we’d expect this to result in additional value of ~$500,000, in addition to what the seller will be paid for their work during the earn out period.
- Bring the business to market without a price attached; essentially an auction.
The best solution, of course, would have been to address this issue long before bringing the business to market but that’s a story for a future post.
2) Geography
Though a business might be performing fabulously in a rural or sparsely-populated area, if that business cannot be operated remotely, finding a buyer might be tough. One of our offices is dealing with this right now.
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REALTORS! Our course, “Learn How to Value and SUCCESSFULLY Sell Businesses“, teaches you how to accurately value and successfully sell businesses.
Don’t Miss Out on the “Silver Tsunami”!
The business in question is desirable; more than a decade old, handsomely profitable, annual (albeit modest) growth, no certifications or special licenses required and little competition. But its geographic market is rural and the nature of its business is such that it would be difficult to expand geographically.
One of the “facts of rural life” for a business owner is that, if there aren’t many people living in the area your business is in, it suggests that not many people want to live there. If the business can’t be run remotely, this situation suggests that finding a buyer is likely to be a challenge.
The business was brought to market at just under $1 million (representing a modest negotiating premium over its value). The marketing done so far to find a buyer – which included a general reference to the business’ region – has generated more than 30 qualified leads, some of which have executed NDAs and participated in calls with the broker. But once a more specific location of the business is disclosed and the realization that acquiring this business would likely require the buyer to relocate, discussions began to fade.
The area is lovely (I’m familiar with it) and desirable to certain individuals. But it’s still rural and lacking many of the lifestyle amenities found in cities; which, of course, is why it’s still rural.
Yes, there may be a local buyer but, if so, two additional issues must be considered. 1) Confidentiality goes out the window and, 2) few buyers generally translates into a lower transaction price than a large buying group would likely generate.
We’ve advised the broker to shift their thinking and reposition this opportunity as a strategic acquisition, something that might appeal to a related business in the area or a competitive business outside the area that might consider expanding their geographic footprint. The broker has identified and contacted about 15 possible targets but, so far, no takers.
The solution to this one is likely to be price. It might be possible to attract an individual buyer by offering a higher return on their investment (by lowering the price) or a strategic acquirer by reducing their risk (again, by lowering the price). And that’s the next topic the broker has to raise with their new year conversation with the owner.
The Bottom Line
Most businesses can be sold simply by identifying the impediments to selling and then correcting them. But as the two examples above illustrate, some impediments, though easy to identify, are not so easily remedied.
When selling a business – as a broker or an owner – you must be cognizant of the reasons businesses don’t sell and make sure that, if any of those reasons exist in your situation, determine if they can be corrected easily or, as with the above, drastic action will be necessary.
If you have any questions or comments on this topic – or any topic related to business – I’d like 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 safe and profitable week.
Joe
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The author is the founder, in 2001, of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) of which there are fewer than 1,000 in the world. He can be reached at
jo*@Wo*******************.com