9 Reasons Your Business Isn’t Selling
Every year we evaluate countless transaction opportunities, but only a small fraction make it through to investment. For instance, last year, we reviewed more than 530 transactions.
While this process seems time-consuming, it's often quicker than you'd expect. Many opportunities are quickly ruled out because it's evident that either we're not the right fit or there's a significant, unresolvable issue.
These issues can vary widely: people problems, financial issues, operational hurdles, or timing problems. While not all problems are insurmountable, the key factor often missing is the seller's willingness to tackle them directly. This willingness is essential for successfully selling your business.
Here are the most common issues we see. If any apply to your business, address them before you bring your company to market.
1. Unrealistic Expectations
Many sellers aim for high multiples, like "10 times earnings," but it's essential to clarify what "earnings" means. Sellers need to accurately measure and communicate their business’s true earnings power rather than focusing on an arbitrary multiple.
For most small companies, unless you're a fast-growing SaaS business, a high earnings multiple is not the market standard.
Source: 2023 Pepperdine Private Capital Markets Report*
Familiarize yourself with market data, such as Pepperdine’s Private Capital Markets report, and be open to various offers. Understand that average multiples are just that—averages. Your business’s valuation will depend on its specific characteristics.
2. Disorganized Financial Records
Investing in lower middle market companies requires substantial financial analysis. If your bank statements can't be reconciled with your financials or if you lack historical financials, your business becomes unbuyable. This goes back to the simple fact that investors invest in order to make money and if it’s impossible to discern how much money -- and we’re talking cash, not adjusted paper profits -- a business makes, it’s impossible to invest in it. Hidden accounts or excessive financial adjustments can also be red flags. Work with a financial professional to ensure your books are accurate and clear.
3. Over-Reliance on the Owner
Businesses that can't operate without their founder/CEO are risky. If the owner holds all key customer relationships and critical roles, the business might not survive their departure. Start delegating responsibilities to capable outsiders and demonstrate that leadership is sustainable and not solely dependent on you.
4. Complicated Ownership Structure
Negotiating with multiple stakeholders complicates deals. Selling or giving equity to partners may seem smart but can create a mess when it comes time to sell. Consider alternatives like phantom equity or cash incentives, and maintain majority control to facilitate smoother negotiations.
5. Challenging Geographic Location
Businesses in states with high regulation and taxes, like California, face additional selling challenges. Recognize these challenges and adjust your expectations accordingly. While selling a business in such locations is possible, it requires acknowledging and addressing these burdens.
6. Exaggerations
There's a natural desire to get top dollar for your business, but overstating its potential can backfire. Investors can differentiate between optimism and reality. Overstating your business’s prospects leads to skepticism and can jeopardize the deal. Be honest about your accomplishments and realistic about your limitations to attract the right buyer.
7. Advisors' Self-Interest
Advisors might subtly or overtly discourage deals that don't benefit them. Consider your advisors' motivations and, if necessary, bring in deal-specific advisors to facilitate the transaction.
8. Dishonesty
Honesty is crucial. Misrepresenting your business, breaking the law, or behaving unprofessionally will derail any potential deal.
9. Combination of Factors
Running a business is challenging, and multiple issues can hinder a sale. By identifying and addressing these factors thoughtfully, you can make the deal process smoother and increase your chances of a successful sale.
By proactively addressing these common issues, you can better prepare your business for the market and improve the likelihood of a successful transaction
Wrapping It Up
Successfully selling your business requires more than just finding a willing buyer. It demands honest self-assessment, diligent preparation, and a realistic approach to the market. By addressing common issues you can position your business more attractively to potential buyers.
Take the time to rectify these issues before you go to market. Doing so will not only make the sales process smoother but also increase your chances of achieving a successful transaction that benefits both you and the buyer. Remember, preparation and transparency are your best allies in selling your business.
