My team is often asked why businesses don’t sell. Although there are a variety of reasons, or a combination thereof, we believe that the pie chart below does a pretty good job of addressing this topic. For brevity purposes, I will briefly address the top three reasons.
#1- Unrealistic expectations. It is human nature for most of us to believe that our assets (houses, cars, businesses, etc.) are worth more than the markets dictate they are worth. The way to address this deficiency is to hire an outside expert that has the capability of providing you with a realistic opinion of what the business will sell for in the existing market to a third party acquirer. As a caveat, understand that the real world may be quite different than an appraisal using IRS regulatory guidelines or comparisons to public company multiples.
#2- Declining business sales. It is challenging to sell a business with declining sales and profits because the buyer, the buyer’s advisors, and the lenders don’t know if the trend will continue. Many businesses encountered this type of trend in 2009 and 2010, during the recent recession. When the business trend reverses and reflects a positive trend, the business becomes salable again.
#3- Poor financial records. This descriptor covers many sins, but is usually correctable. For many years I have preached that “Good financial records sell businesses faster for more money.” By that I mean that accurate and timely financial records are essential to the sale process. It starts by hiring a qualified accountant and maintaining the discipline of properly accounting for business income and expenses, (including accurate inventory amounts, if appropriate for your business).
(originally published in the July 2013 eNewsletter)