Selling a Business: Why Deals Don’t Close – Pt 1, The Seller
17 April 2023: Selling a Business: Why Deals Don’t Close – Pt 1, The Seller
Selling a business is an undertaking that requires a certain amount of knowledge, finesse and understanding – not to mention precision – on the part of the three primary participants: the sellers, the buyers and the third parties in the deal.
The fact that that knowledge, finesse and understanding is often missing in one or more of the participants is arguably the main reason the majority of businesses don’t sell when they first come to market.
How many businesses don’t sell? Depending on the source of your information, somewhere in the neighborhood of 70%-80%. We work in Main St. and Lower Middle markets – businesses with valuations roughly between US$250,000 and $30 million – and our early experience bears those numbers out.
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We offer a comprehensive coaching program – both group coaching in our Brokers’ Roundtable℠ community as well as one-on-one coaching – tailored to Realtors, business owners, buyers and anyone interested in valuing, buying or selling a business.
If you’d like to learn more, email me at jo*@Wo*******************.com
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But it’s important to note the phrase “when they first come to market”, italicized above, because sooner or later, almost all businesses will eventually find a buyer. I can state that based on my own experience back in 2001-2002 from my initial weeks and months as a business broker.
The first listing I took – a regional wholesaler of garden and nursery supplies (plants, trees, ornamentals, etc.) valued at $1.25 million – sold in four months at full price. The second business I listed – a roughly 115-pad mobile home park – took 16 months to sell. Both deals illustrated that when knowledge and understanding are missing from one of the participants, the odds of success fall.
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Our course, “Learn How to Value and SUCCESSFULLY Sell Businesses“, teaches you how to accurately value and successfully sell businesses.
This is Part 1 of a three-part series that focuses on the three principal participants in any business sale. Each of these posts will be somewhat shorter than our normal ones but, hopefully as informative. Let’s get started.
The Seller
Right out of the gate, it’s important to understand that business owners, especially those at the lower end of the market, often have an exaggerated opinion of the value of their business. They also don’t understand that most business transfers involve some degree of seller financing.
As to price, it has to bear a reasonable relationship to value – market value. Sellers will argue that the business has a certain value to them. While this is undoubtedly true, the only value that matters when it’s time to sell is the market value. We do valuations for every business we list so WE can see what the market value is. We don’t want to list a $2 million business for $3 million. The chances it will sell are slim to none – no matter what the seller thinks it’s worth – and our marketing money and efforts will have been wasted. Price to value is usually the first issue sellers inject into the deal.
But financing is another. We continue to hear owners of sub-$2 million or $3 million businesses tell us that they don’t want to do any financing. In fact, they often insist on this condition – at least at first – even though this is one of the first issues we raise with sellers at our initial meetings. The majority of business transfers of that size involve some amount of seller financing.
A third seller issue is time. Many sellers – again, mostly in the lower valuation tiers – tell us they want a “quick sale”. This is another issue we focus on during our initial discussions with the seller. Specifically, we caution sellers that “properly-priced” businesses usually take between six and 12 months to sell.
Note how this issue relates to the first – time required vis-á-vis price – as well as my initial experience with my first two listings. The less the price relates to market value, the more time it will take to sell. And it’s important to note that, if the price is too far north of value, the business may never sell; at least until the seller becomes more knowledgeable and reasonable – like the owner of the mobile home park I mentioned earlier – and lowers the price so that it bears some resemblance to value.
More Issues
Another big issue for sellers is due diligence.
Due diligence can be extremely invasive and it’s not uncommon for sellers to become defensive when asked over and over for clarification about this or that expense or contract.
Sellers have to realize that such reticence only begets suspicion on the part of a buyer which will begin to poison the relationship. We go to great lengths to advise clients that due diligence will be a meddlesome and unpleasant affair and to expect the buyer to, in a manner of speaking, tear the place apart.
Still another issue that can send any deal to the graveyard is transparency – or lack thereof.
Sellers often have a tendency to soft-pedal or even omit mention of problems. Is a contract with a customer unlikely to be extended? Is the key manager about to retire? Does the premises lease require the business to completely remodel every five years?
These issues are almost certain to be discovered during due diligence. If the seller is not forthcoming on these or any other points, a buyer’s trust in ANYTHING the seller says will evaporate quickly – resulting either in an even MORE invasive due diligence or the buyer walking away and finding another target.
The Bottom Line
It’s hard to overstate the importance of preparing a seller for what the process of selling a business entails. It is extremely rare to find a seller with any experience with selling a business. As business brokers, we must assume that this is their first exposure to what we do and the complexities of the process.
Any one of the issues described above – and dozens of others – can derail what in most cases could have been a reasonably attainable goal of selling the business.
Next week, in Part 2 of this series, we’ll look at the problems buyers bring to the deal.
I’d like to hear from you. What topics would you like me to cover? How can we tailor these posts to be more useful to you and your business. Let me know in the comments box, below, or email me at jo*@Wo*******************.com.
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
Searching For…
We’ve been contacted by a U.S.-based search fund looking for opportunities to acquire service and software businesses with between $1M and $5M EBITDA anywhere in the United States.
If any of you know of something that might fit, please let me know.
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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 500 in the world. He can be reached at jo*@Wo*******************.com