Five reasons why some small businesses don’t sell

As a business broker for over 35 years, I’m often asked why some small businesses don’t sell.  It’s a sad situation when a business owner reaches retirement and can’t find a buyer for their business.  Too many times, they just wind up closing the doors.

Walking away with nothing after years in business can be avoided by understanding the reasons why some small businesses don’t sell.  And here we’re defining small businesses as those with annual revenue up to $10 million.

From my experience of over three decades in the marketplace, the following five are the most frequent reasons why some small businesses don’t sell:

Unrealistic Price Expectations

This is probably the number one reason for the failure of a business to sell.

As a personal analogy, when my wife and I were young and welcomed our third child, we decided we needed a bigger home.  This involved putting our smaller home on the market.  We had made some improvements to the home and thought it was worth a lot more than the real estate agent did.  We quickly learned that the market sets the price, not the two of us!

So if you don’t take anything else away from this article, when you start thinking about selling your business, get a professional valuation done.  It will save you a lot of time and grief.

Sloppy Books & Records

I can tell you that missing or sloppy books and records make business buyers suspicious and are another reason why some small businesses don’t sell.   So get those delinquent tax returns filed and work with your accountant to get all your other records cleaned up.

It is not a deal killer if you’ve been running some “unnecessary” expenses through your business to lower Uncle Sam’s tax bite.  Those “discretionary” expenses can be adjusted out in an exercise called recasting to show the true cash-producing ability of your business.

Lack of Proper Representation

I’ve been involved in too many transactions which were torpedoed by absent or inexperienced representatives.  Make sure you have your professionals lined up:

1.  A business lawyer.  Your lawyer should be very experienced in the business buy/sell arena.  A plaintiff injury television lawyer is not the one you want!
2. Your accountant.  He/she will need to advise you on the tax consequences of selling your business.
3. An experienced business broker.  Make sure your broker is credentialed and experienced with knowledge of your business type.  A business broker can be invaluable in this process from start to finish.  But hey, I’m prejudiced!  That’s the enjoyable way I’ve made my living for many years.

Negligible Earnings

If the business is losing money, it really has no ongoing business value.  Speaking frankly, it’s worth only the depreciated value of the tangible assets of furniture, fixtures, and equipment.

However, if there is a reasonable opportunity to turn the business around with additional working capital, marketing savvy, or by other means, it may have some value to a few buyers.

Lack of Acquisition Financing

This issue follows the one above concerning negligible earnings.  If a business is not making a profit, no lender will make a business acquisition loan to anyone to purchase a company that’s losing money.

There are other reasons, also, that financing may not be available.  This could involve the type of business, a declining overall market for the company’s products or services, or the macroeconomic cycle.

In some situations, if the seller is sure of the buyer and the viability of the business, seller financing, after a significant down payment, might be the only way to transfer ownership of the company.  But make sure you, as the seller, are fully aware of the risks.

In Summary

For what it’s worth, you can take my 35 years of experience in this field – with the bruises to prove it – as a real world view of the business sales process and the reasons why some small businesses don’t sell.  But the flip side is that, with planning, most of these problems are avoidable.

Here are other articles that delve into some of these issues in greater detail:

• How to Use Valuation Guidelines to Estimate the Value of a Business
• What are the “Discretionary Earnings” of a Business?
• How to Analyze a Business You’re Considering Buying
• How to Make a Written CONTINGENT Offer to Buy a Business
• Seven Negotiating Rules When Buying or Selling a Business
• How to Conduct Due Diligence When Buying a Business

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William Bruce is an Accredited Business Intermediary (ABI) and Senior Valuation Analyst (SVA) assisting buyers and sellers of privately held businesses in the transfer of ownership.  He currently serves as president of the American Business Brokers Association.  His practice includes consulting services nationally on issues of business valuation and transfer.   With offices in Fairhope, Alabama and Baton Rouge, Louisiana, he may be reached at (251) 990-5934 (Fairhope), 225-465-5799 (Baton Rouge) or by email at Will@WilliamBruce.org.