9 Reasons Why Your Business Won’t Be Sold Successfully
Based on the survey conducted by the International Business Brokers Association, it is estimated that approximately 70% of all businesses will never be listed for sale. Furthermore, out of the businesses that are listed, only 50% will ultimately be sold. Here, we explore nine reasons why businesses may not be sold.
1. Poor Bookkeeping.
When it comes to selling a business, having accurate books and records is absolutely essential at every step of the process. This includes providing tax returns, profit and loss statements, and a comprehensive list of assets that are being sold. Without these basics, the business may be considered unbankable, meaning no bank or lender will touch it, and even a buyer with the necessary capital is likely going to be unsatisfied without having clear financial records. The level of detail needed may go beyond these basics. Potential buyers may also request additional documentation such as payroll reports, depreciation schedules, employee manuals, a list of contracts, and documentation of licensing. The more thorough and transparent the records, the greater the confidence and trust that can be established with prospective buyers.
2. Declining Sales and Profits.
Aside from the occasional business flipper, or strategic buyer, it is quite rare to find a significant number of buyers actively seeking to acquire distressed businesses. Potential buyers are primarily driven by the desire to see a promising return on their investment. They seek businesses with scalable potential and a positive upside, ensuring that the venture is worth their time and resources. If financial records indicate a decline in sales and profits, the buyer will be hesitant to dive in, or may use this information as a reason to present a lower offer.
3. Customer Concentration.
One of the biggest red flags for a potential buyer is when they discover any single customer accounts for more than 30% of the annual income. The risk of relying heavily on one customer for such a significant portion of income is too high for most buyers. Moreover, commercial banks’ underwriters and internal policy makers are unlikely to approve a loan in such circumstances. On the other hand, having a diverse and loyal customer base creates an ideal environment for successfully selling a business. A broad customer base not only mitigates risk but also demonstrates the business’s stability and attractiveness to potential buyers, increasing the likelihood of a successful sale.
4. Dependence on the Owner.
It’s not enough to have solid financial records when selling a business. The most sellable businesses are ones that are not solely reliant on the owner’s presence. In order to achieve this, business owners should proactively seek ways to gradually reduce their involvement and delegate responsibilities to avoid becoming a one man show. This may involve reevaluating and streamlining business processes, adopting new technologies to automate tasks, or even strategically hiring and training additional employees to become effective managers. By fostering relationships with the employees and having automated processes in place, the business can build a strong foundation that is not solely dependent on one individual. This will ensure long-term success, scalability, and a desirable business opportunity for a potential buyer.
5. Deferred Maintenance.
It is not uncommon for business owners to put off replacing aging equipment, machinery, or vehicles in a well-established business. This practice of delaying necessary capital expenditures is often employed as a means to preserve cash flow and maintain short-term financial stability. However, while it may provide immediate relief, it may not be the most effective long-term strategy for growing a company or maximizing the overall value of the business.
By deferring the replacement or upgrade of essential assets, business owners risk falling behind competitors who embrace technological advancements and invest in modern equipment. Over time, outdated machinery and vehicles can hinder productivity, increase maintenance costs, and limit operational efficiency. These factors can ultimately impede business growth and profitability.
Moreover, delaying the replacement or upgrade of aging assets can have implications when it comes to selling the business. Prospective buyers may perceive the deferred investments as a sign of neglect or financial strain, leading them to discount the value of the business. This could result in a lower return on investment for the business owner when it comes time to exit or sell the company.
6. License Restrictions.
In various industries, trades, and professions, specific licensing is a prerequisite to offering specialized products or services. This requirement applies to a wide range of professionals, including plumbers and doctors. Due to these licensing restrictions, the pool of potential buyers for your business might shrink significantly, limiting it to only those individuals who possess the necessary credentials. However, there are creative strategies that can be explored to overcome these licensing hurdles and expand your reach to a broader audience. By thinking outside the box, you can navigate through these challenges and find innovative solutions to maximize the opportunities for your business transaction.
7. Market Forces.
Ultimately, the market determines whether or not a business will sell at a particular price. Market forces are dynamic and multifaceted factors that can significantly influence the supply and demand of a product or service. These forces encompass a wide range of elements, including social, economic, technological, political, demographic, and competitive factors. They continuously evolve and shape the landscape in which small businesses compete.
For instance, changes in interest rates can have a profound impact on potential buyers, affecting their ability to secure loans and finance larger business purchases. Similarly, the introduction of new technologies can disrupt industries by rendering certain services obsolete or by creating innovative solutions that change customer preferences. There are several market forces that can place the business transaction in jeopardy.
8. Rushing to Market
Timing the sale of a business is a crucial factor in maximizing its value and achieving success in today’s complex landscape. While not every business owner has the luxury of exiting on their own terms due to unforeseen circumstances like death, divorce, or disaster, most can take proactive steps to prepare their business for sale. Rushing the business to the market can leave owners in a vulnerable position when it comes to selling. While some businesses may still be sold with amazing results, a rushed sale is more likely to result in a significantly diminished enterprise value even if the sale is successful. However, with adequate planning ahead of time, nearly any of the previously mentioned reasons can be effectively addressed.
9. Skimping on Professional Assistance
Cutting corners on professional assistance can be tempting for business owners aiming for high returns on investment when selling their business. However, neglecting professional guidance can lead to adverse outcomes. Selling a business without prior experience can pose significant challenges for unprepared sellers and result in costly litigations and time-consuming setbacks. Unless the buyer has a personal connection to the owner, navigating potential buyers can be a frustrating and disappointing process. Dealing with tire kickers who make non-serious offers can waste valuable time. Moreover, without the proper expertise in conducting business valuations, the business is likely to be undervalued or overvalued, resulting in limited interest or missed opportunities for profit. From start to finish, the overall success of the sale is in jeopardy without the aid of professional assistance.
In conclusion, selling a business can be a challenging and overwhelming endeavor with a poor chance of success, especially for an unprepared seller. However, by avoiding common pitfalls and taking the necessary steps to maximize your business’s value, you can significantly simplify the selling process. It is crucial to steer clear of these mistakes to ensure that potential buyers recognize the true worth of your business while ensuring a smooth and hassle-free transaction. If you have a business for sale, trust V-AID to be your reliable partner in achieving your goals.