Do you realize that only 20% to 25% of small businesses ever sell? Is your business amongst the 75 to 80% that will not be successfully sold? Statistically, the odds are against you – between 3:1 and 4:1 that you will be unable to successfully sell your business! Have we got your attention? Are you counting on the sale of your business for your retirement funds? Is monetizing the sweat equity you’ve expended in developing and running your business important to you? If so, you need to make sure your business is sellable.
Why aren’t businesses sellable?
The number one reason businesses are not sellable is that business owners fail to plan for the sale of their business. Selling a business is not like selling a house. Eventually almost all houses sell, but as previously stated, only 20% to 25% of small businesses ever sell. There are at least 66 obstacles to a successful business sale, so it takes a lot of forward planning to: 1) identify the obstacles faced by business owners; and 2) overcome or minimize the effect of the obstacles.
Video: Norman A. Hood interviews Jim Stauder, a business broker of BizOwner Advisors on location in St. Louis, MO.
5 more common obstacles that prevent a business from being salable
Small businesses are valued based on seller’s discretionary earnings (SDE). When asked, the "typical” business buyer almost always responds they want to buy a business that will enable them to earn six figures ($100,000 or more). There’s significant demand for businesses with SDE of $100,000 or more and it’s much easier for buyers to obtain financing (for many reasons) at that minimum level of SDE. If the SDE of your business is less than $100,000, the odds of having a salable business are significantly reduced.
Buyers are primarily interested in businesses whose success is not dependent on the owner’s day-to-day involvement and relationships. A sellable business almost always has second-level management that can run the business in the owner’s absence. If you are concerned that your business may not operate efficiently while you are away on a two-week vacation, you may not have a salable business.
Customer concentration is another common obstacle. If you have a single customer who represents more than 10% of your revenues (or profitability), you may have a customer concentration issue. If a single customer comprises 20 to 25% of your business, you definitely have a customer concentration issue that might make the business unsalable. There is a significant risk for buyers and their lenders if the loss of a single customer can devastate the stability of a company.
To be considered a salable business, owners must have realistic expectations as to the value of their business. Far too many business owners put their company on the market with unrealistic expectations. Buyers, especially with guidance from their professional advisors, seldom, if ever, overpay to acquire a business. It’s imperative to know the realistic value of your business and price it accordingly. Serious buyers won’t waste time on businesses they know are over-priced.
If your business has a poor accounting system which produces meaningless financial statements, it’s a huge obstacle to a successful sale. Buyers are interested in businesses that engender confidence. Inadequate financial records create uncertainty and doubt. Once skepticism and distrust arises in a buyer’s mind, a successful sale transaction is highly unlikely.
Video: Bill Whitehurst, a business broker from Dallas, helps business owners understand what a truly sellable business is.
Obstacles, obstacles, and more obstacles
We’ve only covered 6 of the 66 Obstacles to a Successful Business Sale. To be sure your business is sellable, your goal should be to identify the obstacles you face and begin to develop a business exit plan.
Jim Stauder, CPA (inactive), is the Founder and Author of the How to Plan and Sell a Business website. He has been selling businesses in the St. Louis, MO USA metropolitan area for more than 10 years.