Selling a business is no easy business. In fact, more often than we would like, a business for sale gets all the way through escrow… only to fall out right toward the end, for a variety of reasons. Sometimes the reasons are legit; others times they are downright silly.
Here we will address the top issues that stop a business from selling:
1. An overpriced business: This should be as obvious as the morning sun, but it is the number one overarching reason businesses do not get sold. The sellers are asking more than the business is worth. A broker should be able to get a fairly accurate idea of what a business is worth based on the gross sales, the expenses, the assets, and the market. But a lot of brokers either fail to tell the seller the bad news, namely that “the business is not worth what you are asking”, or they don’t really know how to find out and let the seller determine the price, where higher is always assumed better. For whatever the reason, overpricing kills a sale. Buyers either won’t offer on something they think is grossly overpriced – or – in reaction to an unrealistic price they compensate by making an offensively low offer.
2. An unmotivated seller: If a seller really doesn’t care if the business sells or not, and is just throwing out a hook to see if something bites, chances are the property or business is going to be a tough sale. People find ways to make things happen when they are motivated; conversely, they will look for ways to avoid making things happen if they are not motivated. A seller of a business must WANT to sell a business.
3. Poor books and record keeping: Businesses for sale can look great on the advertisements and attract a lot of interested buyers, but if the books are messy or non-existent a buyer with a brain probably will not want to lay down cash on a measly promise. If a business claims to make money, the books better show it. If they don’t, why don’t they? It amazes me how some business sellers think buyers should simply believe them. Buyers are no different than sellers, and need to see the numbers to make an intelligent decision.
4. Seller wants all cash: Here is another deal killer – the seller needs all cash. No seller carry, and no loan. The problem here is pretty obvious: not too many people are sitting on tens to hundreds of thousands in cash, and ready to spend it. Usually those people are interested in buying bigger businesses, and using their cash as down payments. When sellers get demanding on terms, especially in these leans times, their business for sale doesn’t demand much attention.
5. The owner is primal to the business: A lifestyle business that leans heavily (if not entirely) on the personality or connections or skills of the owner, is going to be a hard sell. This reality may come out in due diligence, when buyers begin to realize all the income is based on the woman selling the company, her skills and talents and attraction factors… and they can’t duplicate her.
6. The product or service is obsolete: the seller wants to sell because his market is drying up. Of course. Why not sell your business before you have to close up shop? Well, here again is where sellers need to think like buyers. The Golden Rule applies in business as it does everywhere else. Do unto others… When a buyer investigates the market for the product or service and sees it is going the way of typewriters and video cassettes, he’s not going to shell out some big money merely to watch it burn. He’ll walk, just as the seller would.
7. The business requires a license: many businesses necessitate licensing, especially in California, where someday you may need a permit just to use the toilet. The trades, the professional services, the selling of certain products, certain services… all require licenses and permits. There actually is a good aspect of licensing, in that they give some uniformity and standards to businesses. But the bad aspect of licensing is that they cost money, and… they can be exclusive. A building license can’t just be paid for with money, it must be earned. A liquor license has restrictions on who can take it over; a criminal record can ruin that possibility. So while some licenses represent a dollar amount, such as a franchise fee, others are more specific, and limit who can acquire it, and therefore limit who can acquire the business that makes use of it.
8. Uncooperative landlords: this is one of those reasons that shouldn’t be a reason, but it is. Grumpy landlords who don’t want to help. The variations are limitless, but suffice it to say that if a landlord won’t make some adjustments for a new tenant to take over a lease or start a new one, it can make the deal go south very quickly. And nothing can be done about it.
The reasons most businesses do not sell are not very complicated, and can be remedied. It takes some work, but addressing these issues before they become deal breakers is a worth use of one’s time.
And it sure sells a lot more businesses.
Rhett Kniep is a licensed building contractor and real estate broker. For over a decade he has successfully worked in the real estate investment business, buying and rehabbing and selling investment homes, commercial real estate, and businesses. He enjoys sharing his learned insights in business sales and development with others.