There are probably 100 reasons why but let’s focus on the top 10+ primary ones that are completely avoidable.
Seller Emotion
This is one of the most emotional decisions that a business owner will ever make. It is impossible not to be protective and defensive at the same time. The decision to sell must be thoroughly thought through prior to commencement. Our advice is always “Plan and Commit”. Do not commence until you have a clear plan and are 100% committed. Then work with a professional advisor so that your emotion is not in the forefront.
Lack of Proper Planning
This should never be a decide today – start tomorrow situation. This should be a very well planned and executed process with a strong team involved. It is like making a case to a jury. You want to emphasize every strength of the company effectively. This all goes out the window with deaths – divorces – partner breakups – declining health etc. Have a plan before you find yourself in one of these situations. My least favorite situation is having to look a widow in the eye when they are stranded and don’t know a thing about the company they now own.
Inept Broker
Politely stated, a vast majority of the business brokers are in the wrong line of work and should be selling used cars. You do not want a fast-talking slick dog broker. This is a substance over sizzle model and those without experience and substance get fully exposed.
Unrealistic Valuations
Owners try to sell the past and buyers are buying the future. Owners know how hard they have worked and they want to be paid richly for that. Unfortunately, that is irrelevant to the buyers. It is critical to align on value with your advisor up front. The very best way to get an honest exchange is to write down the value you want and have your advisor write down their thought on value. Then show each other. A quality advisor will commit to a minimum value prior to commencing an offering and if that is unsatisfactory to the seller they should disengage. This is why it is so important to only work with advisors that are on a success fee only basis. They will only commit to values they know they can achieve and they will not promote false hope and expectations.
Incorrect or Incomplete Financial Records
Entrepreneurs are wonderful people. They take risks, create jobs and create great goods and services. Unfortunately, most do not understand or value accounting. They focus on Sales and Operations and almost never value accounting. They think they can stick an accounting clerk ($75,000 or less) down the hall with QuickBooks and everything will be fine. Then they compound it by getting a local CPA who overcharges and provides no financial guidance – just some QuickBooks formatted P&L’s – Balance Sheets and tax returns. That model typically does not meet more than 10% of the needs of due diligence during a transaction. Worse yet – this deficient - incomplete – incorrect financial records cost seller’s millions. A lot more than a real financial accountant would have cost.
Void Created by Owner Departure
The very traits that made you a successful entrepreneur—your obsessive control, your deep personal relationships with key clients, your ability to jump into operations and put out fires—are the exact same traits that will destroy your company’s value when it comes time to sell.
If your business cannot survive a 30-day period without you checking your email, you do not own a sellable business. You own an incredibly stressful, highly-taxed job. And buyers will not pay premium multiples to buy your job.
We see this scenario constantly. A founder builds a company to 10,000,000 in revenue. They are the chief rainmaker, the primary closer for top accounts, the final sign-off on major operational decisions, and the keeper of the most critical vendor relationships. When a buyer looks at this company, they don't see a 10,000,000 million company. They see a house of cards.
Buyers buy transferrable management teams. Get out in front on this one and start reducing your indispensability immediately.
Decline in Revenue Trend
Buyers do not buy a business with the expectation that if it did 8,000,000 last year that it will do 8,000,000 in each of the upcoming five years. Why would you pay the profits of the next five years (5x multiple of EBITDA) to own a company and take all the risks just to breakeven. They buy businesses that have strong growth potential. The metric is Compound Annual Growth Rate (CAGR). They want a growing business to speed up the payback of the purchase price and to ensure a more valuable business in the future. If you have declining revenues, it is a huge red flag that causes buyers to look much deeper to determine what is wrong with the business.
Lost or Potential Loss of Key Employees
Key employees are a primary value component for buyers. This is where excellent planning and communication is essential. A strong advisor will guide you through retention and transition planning as well as a clearly defined communication plan for key employees and ultimately the remainder of your workforce.
Inability to Finance
Most buyers will finance a portion of the purchase even if they possess plenty of liquid funds. This requires a very stable, ratio correct balance sheet, and future earnings that can be relied upon. The buyer will have several debt covenants that they will have to comply with on an ongoing basis. The less debt and more quality assets your balance sheet reflects that better your negotiating position is.
Deal Fatigue
Time is the biggest enemy to all deals because it allows buyers to find better deals as well as many things can happen from the death of a key participant to changing interest rates to an unexpected unfavorable business development. They key is to conduct a swift, deliberate offering process to accommodate the buyers informational and timeline needs.
Deal fatigue is another phrase for irritability. Even the most professional of advisors and attorney’s get deal fatigue when a deal goes on too long or participants are being unreasonable or arbitrary.
Surprises
Then there is the biggest one of all. SURPRISES. BUYERS DO NOT LIKE SURPRISES. All they can conclude is “what else are they hiding from me?”. Ironically, many times the owner is as surprised as the buyer. That just cannot happen or the whole deal can go away in a second.
You need to tell your advisor the good – the bad – the ugly. The only (right) way to conduct an offering is to offer full disclosure and total transparency. A strong advisor will navigate the challenging topics while still achieving full disclosure.
If there are topics that you have deliberately avoided or procrastinated on you will want to get out in front of them before you commence an offering. If you do not, they will cost you a lot more when the buyer takes a “surprise” discount.