A surprising number of businesses just don’t sell. It’s been estimated that only about 1 in 4 small businesses actually sell. Why is that? Well, first of all, 1 of the 4 would probably never sell for a variety of reasons (paltry revenues, losing money, no or little demand for their product or service, etc) and will simply close the doors. What about the other 2 that don’t sell? Why don’t they sell?
* Unrealistic Expectations – this is the number 1 reason that many small businesses don’t sell. It’s human nature to think that the business that you’ve put so much of yourself into has a premium value. However, other parties ( Banks, Prospective Buyers, Valuation experts, etc) will look at your business objectively and apply universal rules in determining its value. In a previous blog (What is Your Business Worth?), I wrote of a boating business owned by 3 brothers (1 active in the business). It was a nice little business and very saleable except for one thing – unrealistic expectations on the part of the 2 inactive owners. They were not dealing with reality. They were in fantasyland! Note – because of the internet most of the prospective buyers are knowledgeable about the buying process and business valuation.
* Lack of Information – many of the small businesses that I’ve dealt with over the years don’t have accountant-generated financial statements. The accountant prepares the tax forms, why not have him/her take the next small step and generate the financial statements? The internally generated statements don’t have all the accruals, depreciation amount, amortization amount and other items that more accurately reflect the performance of the company. Also, customer and vendor contracts need to be updated and readily available for examination. What about key employees? Do they have non-compete agreements or employment contracts? What motivation will they have to stay with the business once it’s sold?
* Landlord agreement – an assignable lease agreement with your landlord is critical if the present location of the business is important to the buyer. If you’re an at-will tenant the landlord can do whatever he/she pleases. I’m familiar with a situation where the landlord, after 12 years and a seemingly good relationship, demanded a big chunk of the transaction amount in exchange for a lease for the buyer! This may seem extremely unethical (and it is!), but according to the lawyers there’s nothing illegal about it.
If you’re thinking about selling your business, it makes sense to perform a pre-transaction due diligence. Using a due diligence checklist, make sure that you have all the forms and financials that a prospective buyer needs. It also makes sense to have a valuation of your business so that your expectations will be aligned with reality. If you need a due diligence check list, let us know and we will provide you with one.
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