Selling a business is a crucial decision that is seldom made lightly. Whether the owner is retiring, relocating, or just looking to try something new, a lot of careful thought and planning goes into the process of selling a company. However, even with all of that preparation, businesses can fail to be attractive to potential buyers, often for reasons that could have been avoided with more focused and informed planning.
As a business owner, are you wondering how to prepare for the successful sale of your business? Keep reading for a full rundown of the top 5 reasons why companies fail to sell, as well as key pointers for how to avoid these pitfalls.
Table of Contents
- Unreasonable Expectations
- Poor or No Exit Strategy
- Unstable Outlook for the Company
- Outside Factors
- Too Specialized or Non-Competitive
1. Unreasonable Expectations
When you’ve spent years developing and growing your business, it’s easy to fall into the trap of viewing things through rose-colored glasses. As the owner, you’re likely so familiar with every aspect of your company that you may miss the bigger picture, in light of all the little details you’ve worked so hard on over the years. This can lead to unreasonable expectations about the value of your company, which can lead to trouble if your asking price is above what potential buyers are interested in paying to acquire your business.
Another common mistake business owners make when trying to sell their businesses is setting a price for the company based on their own perception of value or personal needs, rather than on the company’s actual value. For instance, if you plan to retire after selling your business, you might assume that you need an infinite amount of money, or have a valuation in mind that is based on emotion rather than factual analysis.
Before even embarking on a transaction process, working with estate planners, private wealth managers and a financial advisor to assign a fact-based number to your post-transaction personal needs, as well as your company’s valuation, will avoid unpleasant surprises. Without this type of up-front analysis and planning, you may find that the offers you receive to acquire your company are not quite what you had expected.
Business owners also run into trouble when they expect the deal to go through, or close, right away. It often takes as long as nine months to sell a business, from start of the process to actual receipt of funds and closing, and outside factors or turbulence within the company can make the process take even longer. Some owners get so frustrated with a drawn-out acquisition process that they end up making mistakes that ultimately cost them the deal.
In order to avoid setting unreasonable expectations for the sale of your business, you need to have a clear idea of your goals well in advance of your desired sale date. Sit down with a mergers and acquisitions specialist and get a thorough, unbiased evaluation of your company’s worth and potential valuation. Then compare that value to the amount of money you need to carry out your plans. If there’s a disparity between the two values, come up with a plan to grow and expand your business over the next few years, so that when you’re ready to sell, your company will actually be worth the price you’ve set for it.
2. Poor or No Exit Strategy
Another common mistake business owners make during the transaction, or sale process, is failing to have a solid exit strategy in place. Sometimes, this is because the owner wasn’t planning on selling the business until they were forced to due to an unforeseen event or circumstances. Unfortunately, such circumstances usually coincide with a downturn for the business, while companies are more likely to sell (and at premium valuations) when business is booming.
Another downside to not having a well-planned exit strategy is that the business may be unable to function without your leadership. If you are still an integral part of the day-to-day operations of your company by the time you decide to sell, potential buyers may have concerns about key management risk, and the survivability of your business in your absence.In order to avoid making this error, make sure you have built out a rock solid management team before you even think about selling, and that every aspect of your business can be carried out without you there. Buyers want to buy a business that functions well already; they don’t want to sign up for the long and arduous job of reassigning duties or redesigning processes within a company they weren’t involved in founding. Putting your exit strategy at the forefront of your planning will go a long way toward improving your chances of selling your business at a premium valuation.
3. Unstable Outlook for the Company
As mentioned above, buyers will be concerned if they sense that your company’s future might be unsteady without you at the helm. These concerns will be further heightened by certain factors, such as a weak or missing management hierarchy, poor employee retention, and a lack of clear leadership within the company, outside of the current owner or owners.
If you’re planning on selling your company in the near future, you need to make sure to create a stable work environment with high employee retention. It’s especially important to focus on the stability and structure of your company when you’re getting ready to present your business to potential buyers; you want them to feel that the day-to-day affairs of the organization will be in capable hands when you’re out of the picture.
4. Outside Factors
Unfortunately, some factors that lead to a failed transaction process during the sale of a business are harder to control. However, business owners can plan accordingly with the right guidance. When the economy is in a downturn, for instance, it can be much harder to find buyers willing to take on the risk of acquiring business. There’s also more competition with other businesses for sale during a recession, as many business owners faced with struggling companies or uncertain futures react by putting their companies up for sale.
On the other hand, enterprising buyers with a lot of capital to spare may be more likely to pounce on acquisition opportunities during an economic downturn, particularly if they think they can get a particularly good deal. However, the offers you’ll receive during a recession may be lower than you originally had in mind, partly due to slower and less profitable business and partly due to the overcrowded mergers and acquisitions transaction market. Sale processes for a business can fail in these cases, if the buyer doesn’t feel motivated or inclined to meet the owner’s minimum required price due to the economic climate.
Another outside factor that can cause transaction processes to fail is rising inflation. During periods of high inflation, such as the one we are in right now, businesses are often forced to raise their prices for goods and services, which in turn can lead to a decline in customer purchasing. This translates to a loss of profits for businesses, which can decrease the overall value of a company, and cause potential buyers to shy away from what looks like a risky investment.
While it’s impossible to predict exactly what’s going to happen with the economy in the long term, you can strengthen your position by putting strategies in place for how your company will weather periods of high inflation or economic recession. Being prepared for the worst scenarios will help you stay afloat and increase the stability and longevity of your business, which will translate to a higher value down the road when you’re ready to sell.
5. Too Specialized or Non-Competitive
There’s a very simple reason why many businesses fail to attract appropriate buyers: they’re too specialized in one specific area that buyers see as too small of a market, or worth investing in. For instance, if you started a business focused on a particular wave or trend, that business may no longer be relevant when the trend dies down. If you haven’t diversified or expanded your business into other areas, buyers may see significant downside risks associated with your company, and thus may avoid acquiring or investing in it.
Low or limited barriers to entry can also play a factor in whether or not your business will sell, and at what valuation. A barrier to entry is the cost or investment it would take to replicate your business. If acquirers look at your company and see a model that seems easy to copy, they may be disinclined to acquire it due to the higher likelihood that another business will be able to mimic and outcompete you.
Finally, if your business is in a niche sector or field, there might simply not be a large enough pool of buyers or investors to go around. This is especially true in times of economic recession, when available businesses tend to vastly outnumber the acquirers with the appetite and means to invest or purchase companies. Buyers who don’t know much about your field or your specific consumer base will be wary of risking their capital in acquiring or investing in your company.
Many issues resulting from your business being too specified or non-competitive can be resolved or prevented by diversifying. Diversified companies have an advantage over specialized companies, in that they are more adaptable and better able to weather periods of instability, such as changes in the market or the economy. If your business can demonstrate an ability to shift gears in the event that one of its functions becomes irrelevant to the majority of customers, it will have greater value to potential buyers and be a more attractive investment.
Prepare Today for a Successful Sale in the Future
Even the best-laid plans for selling a business can go awry, resulting in an undesirable outcome or even failure to sell. Understanding the top reasons why companies fail to sell is a good first step to proper planning and future success.
To recap, here are five-questions you can ask yourself to avoid the selling pitfalls above.
- What parts of my selling expectations might a buyer challenge?
- Can I articulate a clear built-in exit strategy to any prospective buyer?
- Is there anything about my business that might lead a prospective buyer to feel it does not have a stable future?
- Are there outside factors affecting the likelihood of a sale that I need to manage or be prepared to speak to?
- Do I need to first invest in broadening the scope of my business or making it more competitive in order to attract the type of buyer I want?
Proactively thinking through these questions ahead of time will streamline the process of selling your company and make it more attractive to potential buyers. Don’t skimp out on the planning process and hope for a successful sale. The time to prepare is now.
Need expert advice? Reach out to DGP Capital in advance to prepare for a business sale in 2023.