Tom West is considered by many to be the founder of modern-day business brokerage. A few years back, he calculated the percent of small businesses on the market that actually sell. For small businesses, those with sales of $10 million or less, he figured fewer than 25% actually transition to a new owner.
That failure rate is shocking, and all too accurate. A lot of factors drive down the 25% success rate, but here are five I that I often hear about:
For Sale By Owner
You don’t know what you don’t know. Selling your business is not the time to learn on the job, as you only get one chance to do this right. There are too many opportunities to make mistakes and hurt the value of your business.
Expectations Too High
One owner decided his company was worth $100,000 for every year he worked, or $2.5 million. In reality, it was worth under $1 million.
A reputable advisor won’t take on an engagement if they don’t believe they can meet a seller’s goals. But some business brokers are happy to tie up a seller and let their business linger on the market — hoping the seller will lower their expectations.
Inflexible Deal Structure
Most small business sellers don’t receive all cash at close. These deals often require some seller financing support, like equity roll-over, a seller note, or an earn out. If you’re inflexible on terms, your chances of transferring ownership decline.
After retirement, burnout is the leading reason that owner-operators sell. They’re already out of energy when they put their business up for sale. Often, revenues slide and the business loses value (or closes its doors) before a buyer is found. Owners who are self aware enough to recognize the signs of burnout are ahead of the game.
Too often business owners want their usual attorney to represent them in a business sale. But because this person has little or no M&A experience, they tend to get ultraconservative.
These advisors don’t want to risk. We’ve seen buyers walk from a deal because the seller’s attorney was unreasonable. Worse yet, on rare occasion, a seller’s attorney will purposely sabotage a deal in order to retain a client or avoid making a mistake that could trigger their errors and omissions insurance.
Honestly, there are probably a thousand reasons why deals don’t get done, but I’d be willing to bet that these five issues are at the heart of most deal failures.
For advice on exit planning or selling a business, contact Al Statz, CEO of Exit Strategies Group, Inc., at email@example.com. Exit Strategies Group is a partner in the Cornerstone International Alliance.