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The Number 1 Reason Companies Don’t Sell

The Number 1 Reason Companies Don’t Sell

I was chatting with a business owner this week, and he told me he’d heard statistics that less than 50% of companies are ever sold.  Why is this the case?  Over the last 30 years, I’ve discovered the number 1 reason that companies fail to sell, and it boils down to one thing:  Timing.

Timing impacts your ability to sell your company in a variety of ways.  Things that you can control include trying to sell too soon or waiting until it’s too late, but there are also factors over which you have no control that can impact timing.

  • Too Soon

Have you developed a product or service, and it just needs that last little push to get to market?  It’s probably too soon to sell.  Looking at your company from the buyer’s point of view, they want to buy the business after it has developed traction.  You need to have illustrated through increasing sales, that there is a need for your product or service.  It’s not just nice to have, customers NEED to have it.  If sales are still nascent and your competitors are thriving, without being worried about a disruption to the market from your new product or service, it’s too soon.  You may be a candidate for an investment from a financial or strategic investor, but your company isn’t likely to be of much interest as an acquisition candidate.

  • Too Late

Much more common is a business owner who waits until it’s too late.  You’ve spent years running and growing your business. Now you’re getting tired; you may have been taking your foot off the pedal, so sales have slipped a bit.  Or maybe a disrupter has come into your market and is starting to steal market share.  But for one reason or another, sales and profitability are on a downward trend.

Buyers are willing to spend money to buy future opportunities for growth and profitability.  Their return on investment comes from profits from the business after closing, and if sales and profits are trending down, they may not believe they can achieve a return sufficient to reward them for the risk they’re taking when they pay you for 3, 4 or 5 years of profits in advance. (“The buyer paid me 5x EBITDA,” means that at the closing, the buyer paid the equivalent of the next 5 years of cash flow if there is no growth.)  Buyers will think that if you, who knows the business better than anyone else, can’t get the business to grow, how could they?

A business owner came to me recently with a well-known business that has been around for 25 years.  Unfortunately, in each of the last 3 years, sales have declined by about $1 million, and the owner is clearly tired and ready to sell.  The owner told me “Listen, it’s a great business; all a buyer will need to do is to invest in better marketing, and do a better job managing the sales force and sales will turn right around.”  This business owner forgot one fundamental truth:  Buyers have limited resources of time and money and want to invest those resources in opportunities, not in risks.  They only get a return on their investment through growth, so if your company isn’t growing, they can probably find a competitor to acquire that is.  (And if they give you an offer anyway, it’s likely to be a low offer that reflects the risk and hard work they’ll have to do to turn the business around.)

  • External Factors

The first two issues with timing are within your control, but external factors are not.  In the external environment, you need to keep on top of four key things:

  • Availability of Bank Financing. Buyers who “pay cash” aren’t actually using cash on hand.  In almost all cases, a big chunk of that cash you’re getting is coming from a bank.  As we saw in 2008 and 2009, when the banks stop lending money, buyers stop making acquisitions.  And even if the banks are making loans right and left, your company must be finance-able.  Some of the things that you can control that impact the buyers’ ability to get financing include:  strong, experienced management team (below the owner); low customer concentration; stability of historical financial performance; and long-term customer contracts.
  • Industry Consolidation. Most industries go through periods of consolidation.  So, if you’re starting to hear about competitors being acquired, it may be time to sit up and take notice.  You don’t want to be the last one standing during a game of musical chairs.
  • Larger Competitors Being Sold at the Same Time. As a small business, you may find that your advisor can’t get attention from the largest, most acquisitive industry buyers if there are several larger competitors in the market at the same time.  Looking at this from the buyer’s point of view, it costs them as much time (sometimes less) and money in professional fees to complete a large deal as it does to complete a small deal.  In most cases, they’d rather invest those resources in a larger deal that will move the needle for them.
  • Economic Cycle. Remember that buyers get their return on investment from future results, so if the economy in general, or your industry in particular, is heading for a downturn, you won’t find a ready stable of buyers excited about making an investment.

Several years ago, I was representing a consulting company that worked with many government agencies.  The company was growing and had a stellar reputation in its field; however, the economy was beginning to slow, and more importantly for their future, the government was tightening its belt buckle and reducing its spending.  There were no buyers interested in buying a business whose only customers were the federal government, when said government had announced significant budget cutbacks.

If you’d like to talk to me in confidence about how to time the sale of your company, please contact me.

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