Financials are incomplete or incorrect.
The number one reason why a business doesn’t sell (assuming it is priced correctly).
No buyer wants to see messy, outdated financials. This can have severe implications on the sales process. If the financials are not transparent and up to date, the majority of buyers will walk away. If the buyer is looking to arrange finance, this will kill the deal immediately.
Given the importance these documents represent, a business owner should ensure that the books are professionally managed and up to date. Records that are messy, incomplete, out-of-date or containing too many personal expenses will only give prospective buyers and lenders reasons to question the accuracy of the books.
Unrealistic seller valuation expectations.
The price a business is listed at is one of the critical elements to a successful sale.
An owner’s emotional attachment to their business, coupled with an inexperienced business brokers desire to obtain the listing and please the seller, can be a recipe for disaster. Overpricing a business will deter
knowledgeable buyers from establishing communications. Additionally, it will be
extremely difficult to defend the valuation when a business has been priced unrealistically. The typical outcome is that the listing will languish in the marketplace and recovery becomes more difficult. Once on the market for months on end at the wrong price, the process in re-pricing and re-listing creates a whole new set of challenges, the least of which is maintaining credibility.
The majority of buyers are seeking profitable businesses with increasing revenue and profits. When a business is showing declining revenue and profits, alarm bells start ringing with the buyer. While buyers traditionally purchase businesses based on anticipated future
performance, they will value the business on its historical earnings with the major focus on the prior 12-36 months. For those businesses which have deteriorating financials, the seller should be able to articulate accurate reasons for the decline. Both the lender and the buyer will need to obtain a realistic understanding of the underperformance to assess the impact it is
likely to have on future results.
- The business has several family members in top management positions.
- The owner is the business. The business cannot effectively run without the efforts and know-how of the owner.
- One or two customers constitute more than 25% of the total business.
- The business’s industry is diminishing or threatened by globalization.
- The owner(s) is aging and has slowed-down, resulting in diminishing revenues.
- The owner did not take time to perform exit or succession planning. To properly prepare the business for sale, the owner should have engaged in exit planning 2-5 years prior to selling.
- Many of the financial rewards of the businesses were taken by the owner in various “perks” which, from a business valuation perspective, will not make it to the EBIDTA as add backs.
- The seller did not take time to become educated on the selling process, especially on the possible ugliness of the due diligence process by the buyer and their advisor.
- The owner did not utilise the professional services a business broker.