Beat the Odds-Most Businesses Do Not Sell

Steps Owners Can Take to Realize a Successful Transaction

By: Philip Steckler

 

The New York Times recently published an article entitled “Why Many Small Businesses Cannot Be Sold” by Josh Patrick.   In the article, Mr. Patrick states that many business owners have a dream of selling their business, but most businesses will never be sold.

He refers to BizBuySell.com, the well known web site where business listings are posted.  At any one time, the site includes about 30,000 businesses for sale.  According to the sites “Insight Report”, transactions which have actually closed per quarter have ranged from 1,650 to 1,890 for the past 5 quarters. This translates into 4% to 5% of the businesses which are listed on the site being sold in any one quarter; or, on an annual basis, 16% to 20% of businesses for sale.     

 

This statistic is similar to that published by the Business Brokerage Press a number of years ago—essentially around 20% of the businesses which are for sale actually sell.  The statistics on “sold” businesses increase to around 35% as businesses get larger and fall below 20% with smaller businesses. 

 

Traditionally the primary reasons businesses did not sell were lack of profitability, and unrealistic expectations of the owner. Competition and industry challenges have become increasingly prevalent in recent years.

  
Businesses are generally sold to the following classes of buyers:

• Individuals (Includes couples)
• Existing Companies (corporate buyers)
• Professional Equity Groups

The size of a business and its related activity influence the type of entity that may be attracted to a business.  Individuals are the prime buyers for smaller businesses, but there certainly are wealthy individuals seeking larger enterprises.  Middle market and larger entities (generally manufacturing, wholesale, or distribution businesses) are attractive to existing companies seeking strategic acquisitions.  These businesses are also attractive to professional equity groups which invest and contribute management expertise.

A successful marketing program should identify the most logical type of purchaser, and focus on generating interest from a number of qualified prospects. 

BUYERS SEEK:

• Profitability and Growth.  Buyers aggressively seek profitable, growing companies.  Businesses which offer these ingredients are in the best position to maximize value.  
• Capable Staff.  Businesses that rely on the current owner for most functions are vulnerable when the owner leaves.  Allocating responsibility to qualified employees broadens the appeal of the business.
• Equitable Price & Terms.  A business is attractive to a buyer if it can generate a reasonable salary, pay debt, replace assets which wear out, and provide a return on investment.

ENHANCING THE SELLING PROCESS:
Business Plan.  Most owners are aware that their business operates better with a working business plan.  However, when it’s time to sell, owner’s often cease planning.  A current plan serves to enhance performance of?? the business during the selling process.  Being on plan reinforces projections and identifies avenues of future growth. 

 

Business Valuation.  This important step is really a decision making tool.  A business owner should proceed with the selling process if a sale will enable him to meet his goals.  Essentially, “can I do what I want to do, and will the sale enable me to afford to pursue my goals”? 

Tax Planning. “It’s not what you sell it for, it’s what you get to keep”.  Uncle Sam has his hand out to receive a share of the proceeds of a sale.  Careful planning can reduce the tax burden, and enhance the net proceeds to the owner.

Professional Help.   Professional advisors are invaluable in the selling process and will generally include:

• Accountant.  An accountant familiar with dynamics and implications of a business sale will recommend allocations of the purchase price and help structure the transaction to minimize taxes.
• Lawyer.  A lawyer protects the client’s legal interests, and some are well versed in tax laws.
• Business Broker or Merger and Acquisition Specialist. Generally the “quarterback” of the team, the experienced broker will prepare accurate offering material, actively search for and qualify appropriate buyers while maintaining confidentiality, work closely with the client’s CPA and lawyer, assist in negotiating the transaction, and help prepare financing proposals and work with the buyer to attain financing.
• Financial Planner.  The financial planner should assist in advising a client how best to invest the proceeds of a sale, consistent with client’s goals.  

SELLING a business is time consuming and complex.  In order to realize the most advantageous sale, the process should be carefully planned and implemented.  Done correctly, most successful businesses sell generating satisfactory results to the business owner.