Selling Your Business: Why Won’t it Sell?
Once you have made the decision to sell, what are your odds on actually selling your business? Well, research shows that your annual sales dictate how well or not well that your business will sell. If your annual sales are $750,000 or less, your odds on selling your business are only 18%. If your annual sales are $750,000-$2 million, your odds increase to 25%. If your annual sales volume is above $2 million, the odds increase to 30%+. Another thing to keep in mind though is the approximately 75% of all businesses have annual sales of less than $750,000.
So what do all these stats mean? To put it sharply: if you are thinking of selling your business, you have about a one in five chance of it actually selling. The next obvious question raised is why are these odds so low? One would think that if you put your business on the market, it should sell in a reasonable length of time. Here are some reasons why businesses didn’t sell, as explained by various business brokers and intermediaries. They are excerpted from an article in INC magazine, April 2002.
- The business is no longer listed for sale. The cash flow was strong, but a lot of buyers thought that the deal was overpriced.
- There was serious interest, but the owner got distracted by an arrangement with a friend to solicit offers. None came through.
- Buyers were intrigued, but the economics of the deal wouldn’t make sense, and the seller wouldn’t negotiate.
- We had three offers, including an accepted bid for $4 million, but the buyer couldn’t get financing.
- We almost had the deal, but financing was impossible to find.
- The deal dragged on for months but fell apart for lack of financing. . .
They say that timing is everything. Many business owners wait until the economy is down Their own business is also paying the price for the slowdown, so they elect to sell. Now they discover that the price they thought they could get for their business is is not realistic in today’s market. Sellers should keep in mind that the best time to sell is when their business is doing well.
One factor that emerges from the comments by intermediaries above is the lack of financing. This would seem to indicate that the sellers wanted all cash, or, at least, a good portion of the selling price was in cash. Three of the comments stated that the reason the deal didn’t go through was that “financing was impossible to find”,
the buyer couldn’t get financing”, and “…fell apart for lack of financing.” The reasons that obtaining financing is so difficult are (1) the business doesn’t qualify for financing, (2) the buyer doesn’t qualify for financing. and, most importantly most small businesses are not financeable. Banks are generally not interested; the Small Business Administration (SBA), although certainly an option, only comes through in less than 10% of deals. If lenders are not interested in financing the sale of the business, there are only two choices: the buyer pays all cash or the seller finances the sale.
Tips for a Fast Sale!
- Prepare a current list of fixtures and equipment
- Have up-to-date financial information available
- Gather all of the information a buyer might like to review
- Maintain normal business hours
- Spiff up the business
- Set a realistic price
- Be willing to negotiate
Want your business to be one in the five that sells? Here are two major ways to increase your odds of selling your business:
- Make sure that you are serious before yo put your business up for sale (see our article: Are You Ready to Sell Your Business? for more on that). You should be willing to accept, within reason, what the marketplace is willing to pay. It’s not what you want for your business, or what your accountant says it’s worth–it’s what a buyer is willing to pay. Find out if the price you are asking is in the “ballpark’ before you go to the market. Your local business brokerage professional is a good place to start. He or she can tell you what similar businesses have sold for and what you might expect to receive if you sell now.
- Be willing to finance the sale of your business. Counting on the businesses selling for all cash or assuming that the business can be financed will most likely make your business one of the four that don’t sell. By showing your willingness to assist in the financing, you reassure the buyer that you have confidence in the businesses’ ability to finance itself. Also, keep in mind that by financing the business you will be entitled to interest on the balance, thereby increasing the price you will receive by selling your business.
Following these guidelines and tips might not sell your business, but it will certainly increase the odds of selling your business. Almost any business will sell under the right circumstances. If you are serious about selling, the fist step would be to call a professional business broker. He or she can answer all of your questions about the selling process and what it takes to sell your business in today’s economic climate.
The Perfect Business
The perfect business, the one that would be sure to sell, has the following attributes:
- A compelling reason to sell
- A desired or popular industry type
- An attractive and strategic location (if important for the business type)
- A reasonable price
- A reasonable down payment (hopefully 40% of the full price or less)
- Seller financing
- Reasonable sales (hopefully increasing each year)
- Seller earnings of $60,000 or more
There is an old adage that goes something like this:
“The worst day of working for yourself is better than the best day of working for someone else.”