Tom West is considered by many to be the founder of modern-day business brokerage. A few years ago, he calculated what percent of businesses on the market actually sell. For most small businesses, those with sales of $10 million or less, he figured fewer than 25% actually transition to a new owner.
A 75% failure rate is shocking, yet it can be an all too accurate representation of our industry. There are a lot of factors driving down success rates, but here are the five I hear about most often:
- For Sale By Owner. You don’t know what you don’t know. Selling your business is not the time to learn on the job, as you only get one chance to do this right. There are too many opportunities to make mistakes and hurt the value of your business as it is a complex process. Having an experienced deal team on your side is proven to be the most critical factor in getting your business sold.
- Expectations Too High. One owner guessed his company was worth about $100,000 for every year he worked, or $2.5 million. In reality, it was probably worth well under $1 million. A reputable M&A firm won’t take on an engagement if they don’t believe it can meet the seller’s goal. But some advisors are happy to collect an engagement fee – and let the business linger on the market — knowing all too well they can’t meet the seller’s expectations.
- Inflexible Deal Structure. Most lower middle market businesses do not get paid all cash at close. Financing the deal usually includes some kind of seller support, like equity roll-over, seller financing, or an earn-out. If you’re rigid about your terms, and the buyer can’t get financing or get comfortable with the deal, the deal isn’t going to get done.
- Seller Burnout. After retirement, burnout is the number one reason people sell. They’re already out of energy by the time they put their business on the market. Revenues inevitably decline and many of these businesses lose value (or close their doors) before they can find a buyer.
- Wrong Advisors. Too often business owners want their trusted lawyer to represent them in a business sale. But because this person is inexperienced when it comes to M&A, they tend to get ultraconservative and approach the sale process as an “us vs them” battle. From our experience, the best advisors are those that see the bigger picture, are good problem solvers, seek to move the process forward, and understand the M&A process well because it is what they do day in and day out.
Honestly, there are probably a thousand reasons why deals don’t get done, but I’d be willing to bet that these five core issues are at the heart of most deal failures.