If you’re considering selling your business, and you haven’t read my previous posts on the subjective factors that affect a business price, the star alignment required to fetch a premium price for your business, or the rules of thumb to calculate a realistic value for your business, do so now!
Today’s post is a little less upbeat but no less important to consider in your decision-making process when determining your business exit strategy or business succession strategy. Unfortunately for many business owners, a business may not attract any buyers or may be valued at even less than the basic return on cash flow. Many business owners unwittingly guide their businesses down this path because they are unaware of the factors that can cause this outcome. Let’s take a look at some of the most common:
Size – The smaller a business, the harder it is to sell. The larger, the easier it is to sell. Buying a business requires capital, a willingness to take risk and the knowledge of how to buy and run a business. Generally speaking those who fit these characteristics are larger companies, institutions and individuals with significant experience. They look to leverage their position by seeking larger transactions. In addition the institutional financing that understands acquisitions is limited and tends to be available more for larger transactions.
Erratic Performance – Acquirers look at historical financial performance as an indicator of the future. The more erratic the performance, the greater the perception of risk. A downward trend can lead to minimal interest by acquirers.
Poor Market Trends – An industry that is having problems usually will result in very weak interest on the part of acquirers.
Owners, Critical to Operations, Not Remaining– If acquirers perceive that the success of the business is largely due to the work of the owner, they will be very wary if the owners will be leaving the business. They will also be concerned if they believe the owner is staying but is no longer as motivated as he once was.
Restrictions in Capital Available for Acquisitions – Availability of financing varies according to market conditions. A lack of outside capital, debt or equity, available for acquisitions can lead to minimal interest on the part of acquirers.
Poor Information – Sellers who cannot provide substantive, verifiable information on their businesses are viewed poorly by acquirers.
Lack of Systems and Controls – Acquirers look for businesses that have systems in place which exhibit soundness of management and an ability to measure performance accurately.
Lack of Credibility – If an acquirer senses during the investigation and closing process that information being received from the seller does not match earlier statements, it is highly likely the transaction will not close.
Are there any other impediments to selling that I’ve missed? Let me know in the comments.