Selling Your Business: Why Won’t Mine Sell?

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Selling Your Business: Why Won’t It Sell?

I recently read an article in a Canadian publication written by a business coach. He started out be relating that he recently gave a speech to a gathering of realtors and one of the questions he opened with was how many of the businesses they listed ever sold. The answer, not surprisingly, was “very few”. Why was this? Thousands of businesses sell every year. From small “mom and pops” doing a couple hundred thousand dollars annually to Middle Market businesses doing $5 million to $50 million a year, thousands of businesses around the world find a buyer each year. If you’re selling your business, are you having trouble?

Closing the DealSelling a business is hard. It requires specialized knowledge, dedication, perseverance and creativity among other traits. But it also requires the seller to take certain specific steps that, when done in the proper sequence, will give the seller’s efforts the best chance of success. Most sellers don’t have the knowledge, don’t know the steps and don’t have the resources needed to pull this off. As a result, business owners that try to sell their own businesses are generally not very successful.

But business owners that list their business with realtors – even commercial realtors – to sell their business are not very successful either. Why? Because they are guilty of the most basic and obvious mistake in this game. It is like asking your dentist to replace your hip. Like most professionals, realtors specialize. But they specialize in selling real estate. They don’t specialize in selling businesses. Realtors don’t know how to value businesses. How can you sell something that you can’t justify the value of?

And business owners don’t know how to value businesses, let alone their own business. Can you think of a more lopsided way to find the value of a business – or of anything – than to ask the owner his or her opinion of that value? I can’t.

If you’ve been trying to sell your business but your efforts have, so far, been in vain, ask yourself: would you buy your business? If so, at what price? More importantly, would you pay the price you’re asking for the business?

Some people claim that there are dozens of reasons that a business doesn’t sell. But I can tell you from nearly two decades of brokering businesses that there is only one: the price is too high. That’s it! If you have a business that is even marginally profitable, there is a buyer out there for it. That buyer may not be easy to find and the transaction may take some ingenuity and imagination to bring to a successful conclusion, but that business can be sold.

There are two general categories of businesses – based on size – and two different types of buyers. Let’s take a look.

Selling a Mom and Pop

Small BusinessMom and pop businesses, also referred to as “Main Street” businesses, are attractive to small buyers – people whose objective is to work for themselves rather than grow a million dollar organization. They buy flower shops, small restaurants, bookkeeping business, pool installers, bakeries, lawn care businesses and hundreds of other small business that they can run locally without having to move the family to Montreal from Toledo. In most cases, such buyers realize that they are buying a job. But the appeal of this is that they are working for themselves; they are their own boss. This is no small matter.

How do you think the fast food chain Subway sold so many franchises? Most of the single-unit owners of Subway – and many other businesses – bought “a job”. They’re not making a ton of money but that was not necessarily the most important thing to them. Sure, they’re probably working harder in this “job” than they would be if they were working for somebody else but that’s exactly the point; they’re not working for somebody else. They’re working for themselves.

Working for yourself gives a sense of freedom and pride that is rarely attainable when working for someone else. Even a small “mom and pop” business offers that opportunity – and there are many buyers of such businesses if the owner can show that the business is making enough money to do the three things it must provide to a buyer. (See first bullet point, below.)

Selling a Middle Market Business

Selling a Middle Market business is a completely different ball game. Your buyers are pros. They’re investors or private equity groups. They’re experienced in running businesses and managing employees. They want a profitable business – or one they can bring to profitability – that will continue to grow. They’re not looking for a job. They want something they can build and, after five or 10 years, sell what would then be a much larger business. That’s their payoff.

Buyers look for a number of things when considering a business to buy. Here are some of the more important ones:

  • A business that’s making money – This pertains to both Main Street and Middle Market buyers. If a business isn’t profitable, it’s probably worth only the value of its assets. A Main Street business must be able to provide some income for the buyer but the business may not be the sole income source for the family and, therefore, the buyer may look at it as having no more than a supporting role in the family’s finances but a big role in the buyer’s sense of fulfillment. But the buyer of a Middle Market business looks for a business that can provide, at minimum, the following three things:
    • An income sufficient for the buyer to support his or her family.
    • A return on the buyer’s invested capital.
    • Enough profit to pay off the financing the buyers arranged to buy the business. That is, it must pay for itself.
  • Recurring revenue – Buyers want to see a regular income in the target business. Ideally this means a history of sales to multiple customers or clients. A business that depends on one or two customers or clients is unlikely to attract many buyers – other than a strategic buyer; a company that wants to expand by acquisition and sees the target business as a logical and complimentary add-on.
  • Growth potential – As I mentioned above, investors, professional managers, private equity groups and similar buyers are not interested in static businesses. They want one that can be grown. Such growth might be in new markets or new products and services. Such buyers look at a business and consider if, with a significant enough cash infusion, the business might grow significantly. The potential for growth is what they pay for.
  • Business systems – Knowledgeable buyers look for profitable businesses that have implemented systems ensuring that the owner is not solely responsible for everything that happens. There must be documented and proven procedures enabling employees to function in the absence of the owner. The existence of such documentation will provide the new owners with a sense of comfort that they, too, will understand the business’ operations. There should be documented systems for everything from paying bills to closing the doors at the end of the day.
  • Diversity – If a business depends on only a few contracts, one major customer or only a couple of suppliers, knowledgeable buyers will be extremely cautious and likely will pass on the opportunity because the risk of losing one of these important assets will seem to be too great. An attractive business has multiple revenue streams, suppliers and customers. Such diversity adds value to the business.

The Bottom Line

Remember: there is only one reason something – be it a car, a business or a pound of potatoes – doesn’t sell; the price is too high. Nearly every business has a value. If you are selling your business, you must know what that value is and price your business accordingly. If you are unable to justify the price you want for the business, you will spend months and even years trying to find a buyer. And the odds are you will be remarkably unsuccessful.

Business ValuationHow do you learn the value? Well, given that this is arguably the most important aspect of selling a business, my suggestion is to get a professional valuation done by somebody that knows what they’re doing. One way to do this is by hiring a business appraiser. But in my experience, a knowledgeable, experienced, professional business broker will be able to deliver to you a Broker’s Opinion of Value – essentially an appraisal without the extra license – at a much more reasonable cost. Such an experienced business broker will also be able to guide you through the process of preparing your business for sale.

If you own a business that you have been trying unsuccessfully to sell, I suggest that you enlist the help of a professional business broker and do so soon. Meet a couple and learn what they do. How do you find a good one? Insert your email address in the box below and I’ll send a list of characteristics to look for when you interview business brokers.

If you have any questions, comments or feedback on this topic – or any topic related to business – I want to hear from you. Put them in the Comments box below. For example, if you want to sell your business, what is your biggest concern about the process? Let me know. 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 profitable week!

Joe

The author holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) and can be reached at joe@WorldwideBusinessBlog.com

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