Reasons a business never sells
There is only one reason a business never sells.
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 every seller fails to consider it properly when trying to sell their business. Sure, there are many situations a business does not sell but there is only one reason.
A business never sells unless there is both 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 they will not sell, it’s all over. Equally, you can have a seller that 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 a four underlying reasons a business won’t sell.
1. A buyer with no money.
It seems obvious but it amazes me how often I get calls from buyers inquiring about a business I have for sale and when they return the Personal Financial Statement I request with the Non-Disclosure Agreement their Liabilities exceed their Assets. When I phone to make sure the numbers are correct, they agree they don’t have any downpayment to buy a business but their explanation is that they presume the seller wants to sell and so would be willing to carry seller finance, that is, they expect the seller will carry 100% seller 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 which is similar to this ‘no down-payment’ buyer is the one that says they are being financed by investors. As soon as I hear this my request is to only speak with the investor as they will be the party to make 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 so I could meet attorneys and accountants that specialize in helping business owners buy or sell a business.
A divorce attorney, personal accident injury attorney or bankruptcy attorney is not the lawyer I want helping with the sale of a business. It requires a different skill and knowledge set.
Equally, many accountants enjoy the very difficult work of putting together tax returns and financial statements but the predominate 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 is a proactive and reactive process with one of the main pieces a seller needs help with understanding how much tax they would have to pay if the business sells. This is done during the negotiations as part of the Purchase Price or tax allocation. It also varies with different buyers wanting a different allocation and is one of the mains reasons why I use a CPA that specializes in the area is so the final tax allocation is fair to both buyer and seller.
3. Too many decision makers
In early 2013 I closed the $2.25 million sale of a family business. The business had been around for about 74 years and therefore had many family members with an ownership interest in the business from the grandfather or great grandfather that originally started the business. The company was run by a board of 9 family members. After working with a buyer for just on 11 months, a final board meeting was required where all shareholders had to approve the sale or it would die. If one family member was 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 they didn’t want to approve the sale because of something that happened about 32 years earlier.
Selling a business has many moving parts. Each shareholder in a business has its own personalities and motivations. The main reason we were able to get so far into the transaction was that one member was the point of contact and it was their role to communicate to the rest of the family.
4. What’s on the tax return is what the business makes
Business owners are by nature optimistic. If they were not they would never go into business in the first place. Optimism however shows up when the seller wants to sell as they are able to highlight all the positives of the business; which makes perfect sense, but they also want to highlight all the potential earnings and ask the buyer to pay for it as part of their purchase price of the business.
One of the steps I take when putting the sale of a business together is to do a valuation so it recognizes the performance of the business. I buy data to see what the same type of business sells for in the same industry, that is, I compare apples with apples. For a buyer to achieve the potential the seller chooses to highlight, the buyer will have to spend their time and money upgrading the equipment, training and re-training the employees, adapting and deploying new technologies all of which requires constant attention.
My role as the broker in the transaction includes to set things up for success, reach as many buyers as possible, organize third party finance such as an SBA loan if necessary and keep the communication wide open between all parties. Which is what I love to do.
Are you thinking about selling your business?
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