Just like there are value drivers that can increase multiples and propel/drive a company’s price higher, in the eyes of a potential buyer, (see “Value Drivers” – That Make Your Business More Valuable and More Salable“) there are also alternative factors that damage value and hinder a potential sale of your business.
When considering an exit strategy for your company the following negative factors below need to be thought-about and addressed, where you can, in order to raise the company’s value and ease the concerns of a possible buyer. If you can not, prepare your business and yourself – to a disappointing market reception, or perhaps eventually, even “closing shop”!
Is your business unsalable? Most are, yours might be too.
Today, what most business owners (who might consider someday selling their business) don’t realize is that 80% of all the businesses listed for sale are not sold or are currently unsalable. That’s right, 4 out of 5 businesses listed for sale – by owner directly, or on all the internet sites – do not sell! Below are usually the reasons why. How does your company compare?
Factors Damaging the Value and Sale of a Business:
1. Year to Year Lower or Inconsistent Top Line Revenue and Company Cash Flow (Adjusted EBITDA)
Year after year of lower earnings and/or erratic up and down cash flows, adjusted EBITDA, will change the picture of a business dramatically, especially to a financing institution. Regardless of the reasons a seller might have, this type of situation often causes potential participants to pause and wait to see how the business works out over time.
No buyer wants to reach his hand out to a falling knife.
It certainly causes a buyer to adjust his/her price to reflect future risk. This needs to be addressed immediately with a go-forward plan. This is where an Advisory Group or your Intermediary can be very helpful.
2. An Evaporating Industry and/or Declining Customer Base
Do we really use fax machines much anymore? Is your business a Timex watch in a digital age? When an industry or a business enters its sunset phase – and customers begin to seek new alternatives or other preferences – you then have a problem. A serious, if not fatal problem. The buyer will see this immediately. Your course of action will be to adjust the business model to move in other directions or your company will evaporate over time.
In other words, you may be going out of business right now, but just don’t know it yet, or have chosen not to recognize it.
3. Too Heavily Dependent On an Owner as Operator – Little to No Company Infrastructure
The more the business is a “one man show”, the much more difficult it is to sell and the lower the price the business will command. Business infrastructure and staff are key, critical assets and very important to the value of a business. If the business revolves around one person (the current owner or a key person), the question will always be – how will the business perform going forward with a new owner? This increases risk and negatively affects value. Acquisitions for a business with a single owner/operator may sometimes be resolved with earn-outs which helps mitigate risk to a buyer, but this is a course of action you as a seller would prefer, if possible, to avoid.
Be prepared, if you incorporate an “earn-out” into the “Agreement to Purchase”, most don’t work out well. The seller should be satisfied, or only depend upon what cash at closing he/she can obtain and any additional payouts, over time, should be considered good fortune.
Sadly for an owner, that’s the way it oftentimes works in the real world. A personal financial “note” from the buyer is a possible remedy, but even then the outcome is challenging. Remember, your business already comes and is being sold with many future risks. You’ve just added yourself to that list.
4. Low Barriers to Entry
The easier it is to enter a business, the less of a business you have and the less your business is worth… if anything.
Why acquire someone else’s mistakes and pay for them when you can start fresh yourself?
For example, opening a shoe store is very easy, it’s just getting suppliers and acquiring inventory. Becoming a carpenter or a plumber maybe just the tools, a truck and internet advertising away. If it’s that easy to start, there is probably very little of a business to sell.
5. Large Revenue Concentration From Only a Few Customers
Regardless the size of the cash flow, if there are only 1, 2, or 3 customers who account for over 70% or more of the revenue, the risk associated with a management change/ownership change is that much greater. Even successful businesses with significant cash flows are viewed apprehensively and discounted by potential buyers when a substantial amount of the revenue stream comes from only one or two sources. Even more so for the “buyer” if one or two of those existing customers are “big box”. The question will always be… Is the business transferable and sustainable through time? Client diversification is critical in building value to a potential buyer for today and tomorrow.
6. Low Repeat Customer Purchases
If few, or if not any, of your customers repeat the purchase of your product or service – that is a perceived company negative or weakness. In other words, if your product/service becomes/is only a one-time purchase in a customer’s lifetime – you probably have a business viability problem.
In this circumstance, to sustain the business going forward there must continually be a substantial need for your product or service, by a significant number of potential customers in your market reach, to successfully survive over time. A “buyer’s” perceived risk of this type of customer (“one and done”), and hence for this type of business, is much greater and it will be factored into a buyer’s valuation.
7. Business Model Based on Lowest Price
Basing a business model on being the cheapest or lest expense is very difficult, if not impossible to maintain. Someone will sooner or later find a better, cheaper way. Now what do you do? What would a buyer do? The risk of sustaining the business over time rises considerably and a buyer’s price will reflect that uncertainty. Candidly, you do not have much of a business to sell.
8. Businesses Offering Commodity Products
The risk is someone else can always open another business next door, or in a better location, or with a much better marketing and merchandising model (see Amazon). It’s like owning and operating a retail golf equipment store in a strip mall which will have a Golfsmith opening across the street. The future will not be bright for you or a buyer. Again, not much, if anything to sell.
9. Unrealistic Buyer/Market Expectations
Remember, the value of your company is what a buyer (the market) is willing to pay and not the seller’s subjective view. The buyer is valuing your business by how much he/she (not you) can make from its operation, not just tomorrow, but in the years ahead. If there is one significant obstacle from the beginning of the transaction lifecycle – it is the owner thinking the business is worth much more than the market is willing to pay.
All to often, it is one or more of the above factors that causes a business to never sell. If the above factors can be addressed and the course of the business right sized there is the possibility that an asset – the business – may be of value and salable.
Prepare your company for an eventual transition starting today – and tomorrow the business may become a more valuable and a more salable asset.
Otherwise, prepare yourself and your business to close (like all the others of the 80%) with nothing to show for it – but memories from a life’s work.