Why Businesses Don’t Sell: Part 1
29 August 2022: Why Businesses Don’t Sell: Part 1
Do you realize that most businesses – an estimated 80% – don’t sell when they first come to market? It’s true.
One of our taglines is, “Every Business that Doesn’t Fail Will Be Sold. Every One!” And that’s also true. But how can both statements be true?
Actually, the first one should be modified to read, “an estimated 80% of business don’t sell – until the reason they don’t sell is corrected.“
A little more than three years ago, I posted about this very topic: why businesses don’t sell. That post related an experience I had as part of a round-table discussion with eight or 10 other business brokers at that year’s annual International Business Brokers Association conference. The topic of that post was, “How Many Businesses Sell?“
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Among that group of brokers, we named at least two dozens reasons – and in that post, I listed more than half of them.
Each broker in that group rattled off their own list of reasons and the lists varied. But what surprised me was that, while each broker named six or seven different reasons, there were three specific reasons that appeared on every list!
The takeaway? Though there are at least two dozen reasons businesses don’t sell, there are three main ones.
This post – the first in a 3-part series – is about the Number One reason businesses don’t sell: Price
Price Versus Value
The Number One reason businesses don’t sell is that the price asked by the seller often does not bear any relationship to the value of the business they want to sell. There are several reasons for this.
- The business owner has no idea what their business is worth.
- The business owner “needs” X amount of money to fund whatever is next – retirement, another business, etc.
- The business owner “heard” that businesses sell for X-times some business metric.
Surprisingly, a very low percentage of business owners has even the slightest idea what their business is worth. As such, when it comes time to sell, they have no idea whether the amount they feel the business is worth is realistic or even justifiable.
When a business owner is ready to sell, they must ask themselves two questions related to the price: Will the business sell at that price and will the net proceeds of the sale fund what they want to do next. Neither question can be answered without knowing what the business is worth.
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Will It Sell? Two Examples.
If you’ve spent any time on our website, you probably know that I started Worldwide Business Brokers more than 20 years ago, in 2001. The first two businesses I listed back in those early days tell the “Will It Sell?” story.
The first business was a plant nursery; a wholesaler that sold to garden retailers up and down the U.S. East Coast. I valued the business at $1.25 million. The sellers studied the valuation report and agreed to list their business at that price. I sold it in four months at full price.
The second business I listed was a mid-size mobile home park business – one with fewer than 500 pads. It was in bad shape. Water lines needed to be replaced; multiple septic systems had failed; some of the roads were little more than mud trails; the vacancy rate was high and dozens of residents were in arrears on rent. Given the significant capital investment the business required, we established a value of $760,000. But the owner wanted $1 million.
I was just starting out so I took the listing at $1 million.
Over the next 10 months or so we received four or five offers, all were around the price we valued it at. After about 10 months of me pleading with the owner to drop the price, he agreed to reduce it to $900,000. During the next couple of months we received two more offers, both for amounts near our valuation.
Not long after starting the second year of marketing the business, the seller agreed to reduce the price again, this time to $825,000. We had the business under contract with a qualified buyer in 30 days and the deal closed at $780,000 – 16 months after we started.
The answer to the “Will it Sell?” question is wholly dependent upon the business’ price relative to its value.
Will It Pay For What’s Next?
What’s the seller’s plan for life after selling? Do they even have one?
Of course, if they don’t they have no idea what they need. But for the sake of this discussion, we’ll assume that a plan for their next phase of life exists. Will the proceeds of the sale fund those plans?
If the seller expects to spend his or her time on the golf course or baking bread or learning another language, those pursuits require one type of bank account. But if the seller intends to join the Formula One racing circuit or race against the Big Dog in the America’s Cup, that requires an entirely different type of bank account.
Assuming the seller has a post-sale plan for life, they have to know what their business is worth before they can have any idea whether the net proceeds at the sale of their business will be even remotely close to what they need.
Many business owners have spent many hours calculating what they’ll need post closing. But they’ve spent nothing to determine what their business is worth – whether it will provide the capital they need. The result? They bring their business to market at a price that reflects what they need but bearing absolutely no relationship to what it’s worth.
It’s important to bear in mind that the only person to whom what the seller “needs” is relevant is the seller. Buyers couldn’t care less what the seller needs. Buyers are concerned only with what they need; the ability of provide for their family; the return on their investment; the potential to grow and eventually resell the business.
The Bottom Line
On order to successfully sell a business, its price must reflect its value.
Our tagline – “Every Business that Doesn’t fail will be sold. Every one!” – notwithstanding, thousands of businesses come to market each year that won’t sell – at least until the reason they won’t sell is corrected.
The market – that is, buyers – doesn’t care what the seller needs or wants for the business. The market cares about value and value is derived from multiple inputs including the business’ earning capacity – for a financial buyer – and synergy – for a strategic buyer. But regardless of the type of buyer a business is likely to attract, without knowing how the market will likely value the business, the chance of attracting any buyer at all is remote.
Remember, we are in the beginning stages of the so-called “Silver Tsunami“. Baby Boomers are heading for the exits, a trend projected to continue for at least the next decade. Buyers have an extensive pool of opportunities to choose from and sellers have to be cognizant that they have competition – which is another aspect to consider when asking “Will It Sell?”
Next week we’ll discuss the second of the top three reasons businesses don’t sell.
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 joe@WorldwideBusinessBlog.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.
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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 joe@WorldwideBusinessBlog.com