For many years, there have been business broker surveys regarding the number of businesses they have for sale versus the number of businesses actually sold. Unfortunately, nationally, less than 30 percent of businesses that are listed for sale actually sell. The truth is that many of these listings were destined for failure because they were grossly overpriced to begin with, the business that didn’t make any profits, the business that lost its lease, or for a host of other reasons. But how about those businesses that received an acceptable offer? Why do so many of those deals also fail to close? Every business sale is different, and every business for sale is in a different situation. These are the top reasons why business sale transactions fail to close in San Diego. We have identified that most failed transactions can be summarized into four areas.
An Inaccurate Business Valuation and Listing
First, many business sellers didn’t receive a proper or thoughtful business valuation or analysis of their business. Far too many business brokers ask the seller what they think it’s worth, then advertise the business for sale at an unobtainable price. It is very important to have reasonable expectations as to the value of your business and the likely business financing scenario, which might include a little participation by the seller. While many business brokers do not like to do the work up front, it’s important to fully understand the value of the business, and where and how it can be financed. Otherwise, while you might have an attractive business that is worth $1MM, if the broker has agreed to advertise it at $3MM, and you get an offer at the actual value of $1MM, that business sale transaction is not likely to close.
Lacking A Comprehensive Business Review
Second, poor planning by inexperienced business brokers or M&A intermediaries is often to blame for your business sale not closing. A good business broker will write a comprehensive confidential business review or business profile, outlining most of the key points of the business. These include a financial summary that spans several years and is based upon the sellers’ actual financials, an outline of the marketing efforts, and an explanation of the key employees and their skills and tenure. If a business broker fails to understand what makes the business tick, then even when an offer is accepted, the deal might not close because the buyer sees something they don’t like. For example, that 85% of the revenues are derived from a single customer, or that 90% of revenues result from a single salesperson’s efforts, and that salesperson is 74 years old and retiring soon. When selling a business, it takes an effort from all parties, and the preparation and time spent by the business broker upfront is a key factor in whether or not that deal will close.
A Poor Team of Advisors
Third, the seller has selected a poor team of advisors. Above we discussed how choosing the wrong business broker can impact the sale of the business, but the seller’s other advisors are also important. The seller must have proper guidance on the taxation involved with the business sale, so they need to have an experienced CPA with business sale transaction experience. The seller must also have an attorney that understands business sales or mergers and acquisitions, and be a deal maker, not a deal breaker.
Business Buyers and Sellers Lacking Commitment
Fourth, all parties, including the seller and buyer, must be committed to the process. When a buyer makes an offer on the business, they need to be committed to that transaction. That means they have investigated and want to own a business in that industry. They also understand, and the business broker has reiterated, that buying a business takes a full commitment from both the buyer as well as their spouse. Full personal guarantees are required by the lenders, and often the business buyer’s personal real estate will be used to secure the loan for the business sale. A buyer that doesn’t understand the level of commitment prior to making an offer, will often back away from the deal when they do finally understand. Commitment is also important for business sellers. Business sellers should never “test the market” and see what kind of offers they might obtain. When the business owner makes the decision to sell, they need to be prepared to close. All too often the owner of a business doesn’t think about what they are going to do after the sale of their business, until the few days prior to the closing. A business is often the owner’s identity, maybe friendships were made and revolve around customers or vendors, so understandably its an emotional decision to sell a business. But the time to consider this is before taking the business to the market.
Of course, there are hundreds of reasons a business sale transaction might fail to close. Many San Diego business sales fail to close due to third parties that were presumed to not cause any issues, but ended up becoming an issue. By considering these four areas, experienced business brokers and their business owner clients will greatly improve their odds of selling their San Diego business and avoid unforeseen deal breakers.
Ready to take the next step in selling your San Diego company? Contact the expert San Diego Business Brokers of Vanguard Resource Group today!