Why Hasn’t My Business Sold Yet
By Don Beezley
Selling a business can be exciting, challenging, frustrating—and back to exciting again.
You’ve worked hard and now are looking forward to the next phase of life, whether that’s retirement, more time on other projects, on to a new business or career, or just simplifying your life.
On average in the United States, it takes 18 months to sell a small business. We’ve seen a record of 67 days from listing to close on one end to never on the other end. If you’ve only been on the market for six months, the answer is easy: it’s only been six months. A business is a complex investment. It’s not like selling a car, a house, or even a commercial building. A business isn’t a commodity. Each business is a completely unique investment with unique attributes and risks. Some of the things that will stretch out the amount of time it takes to sell are explored below. These things also provide a roadmap to making your business more attractive—by eliminating the things that are a challenge.
We’ve outlined five common challenges here, along with possible solutions:
- Financial Performance
This is the single biggest challenge that can make it take longer to find the right buyer. Inconsistent or declining financial performance (sales and profitability) is a red flag. Poor gross margins are also a factor—if a new buyer works really hard to grow, how much of each new dollar in sales will make it to the bottom line. Your gross margins (or gross profit) are the single greatest contributor. It’s also a fact that different size businesses have different markets. A business with less than $500,000 in EBITDA (Earnings Before Interest Taxes and Depreciation) has a smaller market than one with $500,000 or more. $1,000,000, $2,000,000 and $5,000,000 in EBITDA are other key benchmarks. A business with $250,000 in EBITDA is hard to create a compelling investment return story. Assuming a 4X EBITDA value of $1,000,000, once a buyer pays themselves and services their debt that helped them buy the business, not a lot is left over to provide a return for the risk of taking on the business itself and may make financing the purchase very difficult if not impossible.
Solution: Take action to shore up margins and have a defined plan in place to consistently grow with a goal of getting over $500,000 in EBITDA.
- Quality of Financial Information
Can a buyer rely on the financial information you provide? Is the P&L logically structured based on a good chart of accounts? Is the balance sheet a jumble of old stuff that was never cleaned up or a good reflection of the assets and liabilities in the business? Do your financial statements match your tax returns? Do you wrap up a given month’s financials within 30 days of month end? Buyers scare easily if they don’t think the financial information is of high integrity.
Solution: If the answer to any of the above is “no,” work with an accounting service to clean up your financial statements so they are a good reflection of your business. Buyers (and their banks) need this, but you also need it to properly manage your business. If you aren’t good at accounting, please give serious consideration to using an outside bookkeeping service.
- Customer Concentration
If you have more than 20% of your business wrapped up in one customer, every buyer will trip over this issue. From your perspective, you have a great customer and they have helped drive your success, how could that be a problem? But for a buyer, that represents risk. If your biggest customer is 50% of your business and they go away after a sale, the buyer will have overpaid for your business by 2 or 3 times. Remember, risk and value are intertwined, but so is the actual salability/attractiveness of your business.
Solution: The obvious answer of course is to add more customers and grow your existing customers, which you should do. Less obvious is to be flexible and realistic in a deal. Maybe the cash flow numbers say your business is worth $5mm, you have 70% of your business with one big customer. You may need to take less at closing and structure a note as an “earnout”—the note can get reduced if that big customer goes away. A seller’s issue with this is that they aren’t running the business, so what if the buyer runs them off? Legitimate concern, but you built the business you built that created the risk, not the buyer. An additional solution is to reduce your value expectations or stay with the business after the sale for a year or two to protect your interests.
- Niche Industry
Some businesses service a relatively small or specialized market. This has two effects. One, it limits the potential growth of the business which may make it less attractive, and it also narrows the types of buyers who will be interested. Everyone thinks they can succeed with a heating and air conditioning service company, but few people will be interested in a business that cleans specialty woodwind instruments.
Solution: Add complementary services that might expand your market. It’s also critical to have excellent profit margins. Money can overcome a lot of objections and concerns.
- Value Expectations
A seller’s needs don’t dictate the value of the business—A buyer’s perception does. Listen to feedback and offers from buyers, your profitability has to make sense for the buyer at a given price.
Solution: You don’t have to accept anything that doesn’t work for you, but most businesses settle in on a value range in the mind of buyers. If you are growing and have more potential, that range can be nudged up-so keep growing and watch those margins. Sometimes the answer is to wait. If we aren’t getting the response we need for identifiable reasons, we may need to pause and relaunch at a better time.
Naturally, there are many other things that can affect the salability of your business such as interest rates, how hard the seller is to replace, key employees in place, good customer contracts, reputation, and so on. Some patience is required, however; that’s just the nature of the process.
Rest assured we typically have your business on eight to ten market exchanges, in our buyer database, on our bi-monthly email campaigns, and engage in “refresh” strategies on all the above, but never hesitate to share marketing ideas with your advisor—no one knows your business and industry as well as you do!
Don Beezley is President of Proforma Partners, LLC and a Business Certified Appraiser (BCA) with over three decades of M&A, banking, and business operations experience.