If you are a business owner, this statistic should get your attention: Nationally, less than 20 percent of businesses that go to market will sell.
Business sales are an incredibly emotional and inefficient marketplace with numerous variables that cause deal failure.
There are thousands of businesses for sale in today's marketplace. Just check out some of the business for-sale websites such as BizBuySell, BizQuest or others and see the thousands advertised for sale.
According to BizBuySell, in addition to businesses that don't sell, only 10 percent of all would-be buyers actually buy.
Why is this? It doesn't make any sense.
There are so many buyers looking for investments and many more looking to replace income from a job. Why is it that the odds of selling and buying are so low?
It turns out the sale of a business is a very precarious process. Here are three of the most common reasons why the process breaks down.
(1) The business is distressed, not profitable or revenues have substantially declined.
In today's market, the majority of business buyers are looking for a business that will provide an income. An unprofitable business or a business that appears to be financially distressed is simply not a good investment and won't provide the necessary income for the buyer.
Many of the businesses in this category do not sell. In many cases, the owners of these businesses run out of money and simply close.
(2) The owner is the business.
In a small or medium-sized business, it is common to find a situation in which the owner is an integral part of the business. The business simply cannot exist without him.
If the owner has not built a team that can handle day-to-day operations of the business without him, the odds are that the business will not be salable.
(3) The financial representations cannot be substantiated.
Many times the gross revenue and net income or cash flow numbers that have been stated by the seller cannot be substantiated.
Once the buyer gets to the due diligence stage, he or she finds that the numbers represented are far from the reality of the business income. Then the buyer gets aggravated and feels his or her time has been wasted.
Sometimes, the seller was being deceptive and other times the seller believed the numbers he stated were true. Then there are times that the seller has stated numbers based on the potential of the business and not the revenue being generated.
There are many other reasons businesses don't sell.
The business may be in a declining industry; it may not be licensed properly; third-party interference; seller not prepared for “what's next,” leading to seller's remorse; lack of financing; too much debt; the owner simply cannot afford to exit; lack of experience in buying or selling a business; lack of using professional advisers; and it may be overpriced.
And some sellers want to convert sweat equity into dollars and cents. The market simply doesn't work that way.
In the end, it's no wonder that only one in five businesses sells. However, that low percentage can be dramatically increased if business owners spend a little time on education and preparation.
It is critical to develop a succession-transition plan consisting of three main components: maximizing company value; personal financial planning; and a life plan for the exiting owner.
An understanding of what buyers in the marketplace are seeking, ensuring you will have enough money to support your retirement goals, and preparing for the next third of your life will rapidly improve the odds of your business selling.
Entrepreneur and author Jim Rohn said, “If you don't design your own life plan, chances are you'll fall into someone else's plan. And guess what they have planned for you? Not much.”
All business owners will exit their business, either on their terms or someone else's.
You get one shot at this. Get someone on your side and do it right.
Tom Garrity is managing partner of Compass Point Consulting LLC in Bethlehem. He is a certified coach with Gazelles International and a certified exit planning adviser with the Exit Planning Institute. Compass Point provides growth and business transition consulting to small- and medium-sized businesses. He can be reached at 610-336-0514 or email@example.com.