It would be nice to live in a world where every business-for-sale was sold at top dollar. While there is no such thing as a perfect business free from all defects, there are several problems that can hinder a sale that could be remedied, if given enough time. Following is a list of reasons which are often cited as contributing factors in an unsuccessful sale or a completed deal for less than potential value.
Valuation: The listing price of a business is the most critical element of a successful sale. An owner’s emotional attachment to their business can be a recipe for disaster. Overpricing a business will deter knowledgeable buyers from establishing communications. Additionally, it will be extremely difficult to defend the valuation when a business has been priced unrealistically. The typical outcome is that the listing will languish in the marketplace and recovery becomes more difficult. Once on the market for months on end at the wrong price, the process in re-pricing and re-listing creates a whole new set of challenges, the least of which is maintaining credibility.
Terms: Deal structure, asset allocation and tax management must be addressed proactively and early in the process. Often the Buyer and Seller place all of the focus on the sale price at the expense of the ‘net after-tax results’ of a business transaction. In most cases, a seller could achieve a deal that provides a greater economic benefit when an experienced Tax Attorney/CPA assists with structuring the transaction. In addition to structure there are several other issues that could be problematic, including:
• Seller insists on all cash and is inflexible in negotiating other terms • The buyer’s unwillingness to sign a personal guarantee • The lack of consensus on the Asset Allocation • Seller insisting on only selling stock (typically with a C-Corp) • Inability to negotiate equitable seller financing, earn-out, non-compete
LACK OF PROFESSIONAL ADVICE
For a successful sale to occur, a business owner must have the right team of advisors in place. An experienced mergers & acquisitions intermediary will play the most critical role - from the business valuation to negotiating the terms, conditions, and price of the sale as well as everything in between (confidential marketing, buyer qualification, etc.).
A business attorney who specializes in business transactions is critical. Experienced transactional attorneys can anticipate problems and issues thereby facilitating the deal.
Additionally, a competent CPA who is knowledgeable about structuring business transactions will be the third key role. While a business owner’s current legal and tax advisors may have the best of intentions in assisting their client with the business sale, if they are not experienced with mergers and acquisitions it would be highly recommended to evaluate alternatives.
Most buyers are seeking profitable businesses with year-over-year increasing revenue and profits. When a business has a less stellar track record with varied results or possibly declining revenue and/or profits, complications with the business sale are likely to occur.
Not surprisingly, decreasing profits and revenue will have a material impact on the business valuation. While buyers traditionally purchase businesses based on anticipated future performance, they will value the business on its historical earnings with the major focus on the prior 12-36 months. For those businesses which have deteriorating financials, the seller should be able to articulate accurate reasons for the decline. The buyer will need to obtain a realistic understanding of the underperformance to assess the impact it is likely to have on future results. In cases where the seller is confident that the decline was an anomaly and is not likely to repeat itself, structuring a component of the purchase price in the form of an earn-out would probably be necessary.
Cash flow drives valuations and business acquisitions. The consistency and quality of revenue and income is a key focal point when assessing an acquisition.
INACCURATE OR INCOMPLETE BOOKS
Accurate, detailed, and clean financial statements are critical to a successful sale. These financial statements will be the basis for the business valuation and will be the criteria for bank funding. Given the importance of these documents, a business owner should ensure that the books are professionally managed and up to date. Records that are messy, incomplete, out-of-date or containing too many personal expenses will only give prospective buyers reason to question the accuracy. Finally, businesses that have a ‘cash component’ will need to report 100% of this income for it to be incorporated in the valuation.
Businesses that have a handful of customers that produce a large percentage of the company’s revenue, have customer concentration issues. It is important for owners to recognize that a business which lacks a broad and diverse base of customers possesses more risk for a buyer as the loss of any one of these large clients could have a material impact on the future earnings. As a result, customer concentration will influence the valuation, deal structure, and salability of the business.
THE OWNER IS THE BUSINESS
It is not uncommon for the owner to play a significant role in the operation and management of a business. This is particularly true with smaller enterprises. The situation presents a problem when the owner is not only the face of the business but also deeply involved with all facets of the company – sales, marketing, operations, management, and financial. If there are no key employees and few written processes or procedures, the business lacks a dependable, repeatable work flow. When it becomes evident that the business cannot operate effectively without the owner’s hands-on involvement and personal know-how, it is problematic. Equally concerning is the relationship the owner may have with the customers of the business. If the customers do business with the firm largely because of the owner, customer retention concerns will arise. In summary, buyers want a business that can operate independently from the current owner.
THE OWNER IS AGING AND HAS SLOWED-DOWN
Business owners may become complacent after running the company for an extended period. Becoming tired and lacking the previous ‘fire in the belly’ has a way of spilling over into the business fundamentals. The number of trade shows that the business participates in decreases, the marketing and new customer sales calls that routinely took place in the early years, have dwindled. The investment spending on equipment upgrades, vehicle replacement and technology have been cut back. Innovation has come to a grinding halt and the business is on auto pilot. The net result is the company’s performance slowly begins to deteriorate. Unfortunately, this situation can become even more pronounced when the owner finally makes the decision to sell the business and mentally checks out at the worst possible time.
Most small business owners have spent the majority of their lives building a business. Often the emotional attachment blinds an owner from glaring problems that may exist in the business. To successfully sell your business, it is paramount that you develop the ability to be objective and set your emotions aside.