Following are the most common obstacles that prevent a business from being sold:
Poor Accounting Records
Buyers need to be confident that what is represented about the business is true and they will seldom buy a business if the financial results cannot be documented.
Unrealistic Asking Price
Most businesses are valued at a multiple of their Seller’s Discretionary Earnings (“SDE”) which is EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization), plus all of the direct and indirect benefits that the business provides the seller such as salary, bonuses, auto expenses, health & life insurance, travel & entertainment, relatives on the payroll, toys, etc. Each industry has its own SDE range of values. Businesses rarely sell for more than what the numbers can support.
Seller Demanding All Cash
Financing is the biggest challenge in selling a business today. Seller financing is often required for from 20% to 50% of the sale price. Most buyers would prefer to purchase a $2M dollar business with 50% down vs. a $1M business for all cash, with the first business making considerably more money than the second one. Also, a seller note gives the buyer some assurance that the seller has been truthful and is committed to the buyer’s success.
Low Or No Profits
There are few motivations for a buyer to make a big financial commitment for the opportunity to work 50+ hours a week and make low profits or a loss. We have sold a number of underperforming businesses but such buyers are very difficult to find. A business with flat to down numbers is a big concern to a buyer as they do not know where the bottom is and when, if ever, results will improve.
Lack Of Trust
Buyers will seldom buy and sellers will seldom sell unless there is mutual trust and respect.
Customer, Geographic, Product and/or Industry Concentration
Concentration increases the risk to a buyer. Accordingly, the more concentration the more problematical it will be to find a buyer.
The big threats today for many businesses are: China/India, virtual/home based businesses, franchises, and a formidable competitor in the area.
Landlords kill many business sales by not approving the buyer/new tenant or demanding unrealistic lease terms. So, keep a good relationship with your landlord.
As with selling a home, first impressions are very important. A few thousand dollars spent on paint, cleaning or replacing carpet, fixing signage, de-junking, etc. can make a big difference in the number of offers we generate and the ultimate sales price of a business.
Limited To No Upside Potential
A business without growth potential is challenging to sell. Help the broker identify and document sales and earnings growth opportunities. Buyers will buy for potential but they will not pay much for it.
About The Author: You may contact D. Joe Atchison at 951-277-4002 for a no-obligation consultation regarding your business or a business that you are considering acquiring. Joe is a licensed Business Broker, a Certified Business Intermediary (International Business Brokers Association), a Certified Business Broker (California Business Brokers Association) and is a Certified Public Accountant.