There is only one reason a business never sells. A business never sells unless there is both a motivated buyer and a motivated seller.
I can already hear you reading that statement and saying to yourself – What’s Andrew talking about? Yet it’s true, and I would suggest that every seller fails to consider it properly when trying to sell their business. Sure, there are many situations in which a business does not sell, but there is only one reason.
A business only sells when there is a motivated buyer and a motivated seller. If one is missing, the business never sells. You can have the most motivated, skilled, experienced, enthusiastic, and financially qualified buyer, but if the seller gets cold feet and decides not to sell, it’s all over. Equally, you can have a seller who wants to offer what they consider the best price and the best terms of the sale, but if the buyer is not motivated, for whatever reason, the business will not sell to this buyer.
Here are Four Underlying Reasons a Business Won’t Sell
1. A buyer with no money
It seems obvious, but I am amazed by how often I receive calls from buyers inquiring about a business I have for sale. When they return the Personal Financial Statement I request with the Non-Disclosure Agreement, their Liabilities often exceed their Assets.
When I phone to confirm the numbers are correct, they agree they don’t have any down payment to buy a business. Still, they explain that they presume the seller wants to sell and would be willing to carry seller finance, that is, they expect the seller to carry 100% of the finance.
A buyer with an inadequate down payment is not a buyer. They are simply a person with too much spare time on their hands, as they will not be able to buy a business.
The other type of buyer, similar to the ‘no-down-payment’ buyer, claims to be getting financing from investors. As soon as I hear this, my request is to speak only with the investor, as they will be the party making any final decisions about the purchase.
2. An attorney or CPA with no experience
One of the reasons I joined the Sacramento County Bar Association and CalCPA was to meet attorneys and accountants who specialize in helping business owners buy or sell a business.
A divorce attorney, personal injury accident attorney, or bankruptcy attorney is not the right lawyer to help with the sale of a business. It requires a different skill set and knowledge.
Similarly, many accountants enjoy the challenging work of preparing tax returns and financial statements.
Still, the predominant service they provide the business owner is looking backward to advise how well they did, and that’s the extent of their help.
Selling a business in California is a proactive and reactive process, with one of the main pieces a seller needs help with being understanding how much tax they would have to pay if the business is sold. This is done during the negotiations as part of the Purchase Price or tax allocation.
It also varies depending on the different buyers’ allocations. One of the primary reasons I use a CPA specializing in this area is to ensure a fair final tax allocation for both the buyer and the seller.
3. Too many decision-makers
In early 2013, I closed the $2.25 million sale of a family business. The business had been in operation for approximately 74 years and had many family members with an ownership interest in the business, dating back to the grandfather or great-grandfather who originally founded the business.
A board of 9 family members ran the company. After working with a buyer for just 11 months, a final board meeting was required, where all shareholders had to approve the sale; otherwise, it would be rejected. If one family member were to vote against the sale, it could not happen.
As you can guess, one family member with less than 1% stock in the corporation decided not to approve the sale due to an incident that occurred approximately 32 years earlier.
Selling a business in California involves many moving parts. Each shareholder in a business has their own personality and motivations. The main reason we were able to progress so far in the transaction was that one member served as the primary point of contact, and it was their role to communicate with the rest of the family.
4. What’s on the tax return is what the business makes
Business owners in California, by nature, are optimistic. If they were not, they would never go into business in the first place.
Optimism, however, emerges when the seller is motivated to sell, as they can highlight all the positives of the business. This makes perfect sense, but they also want to highlight all the potential earnings and ask the buyer to pay for it as part of the purchase price of the business.
One of the steps I take when preparing to sell a business is to conduct a business valuation, which recognizes the business’s performance. I buy data to see what the same type of business sells for in the same industry; that is, I compare apples with apples. See a sample business valuation in California.
For a buyer to achieve the potential the seller chooses to highlight, they will have to invest their time and money in upgrading the equipment, training and retraining employees, and adapting and deploying new technologies, all of which require constant attention.
My role as the broker in the transaction involves setting things up for success, reaching as many potential buyers as possible, organizing third-party financing, such as an SBA loan if necessary, and maintaining open communication among all parties. This is what I love to do.
Are you thinking about selling your business in California?
Would you like to know the value of your business in California?
For more information, please visit our webpage on Business valuation.
For more immediate assistance, you are welcome to contact Andrew Rogerson or call me Toll-Free (844) 414-9700 or email me at support@rogersonbusinessservices.com.
Further reading
Selling A Business To A Strategic Buyer | 10 Factors in California