Last week, I gave a talk to a commercial real estate association. They asked me to talk about how they could sell more listed businesses. During the presentation, I asked them what percentage of businesses that are listed, are actually sold.
The response was "very few."
I wasn't surprised.
You see, not only is it hard to sell your business, but it is harder to get a good price. The reason is that most business owners don't actually understand what makes a valuable business. They think a business is valuable if it is making money. That is not actually correct. The truth of the matter is that most business owners are not selling a business, they are selling a job. In order for a business to be valuable the buyer must see the value. So how do we enable a buyer to see the value?
Buyers want a number of things that include:
1. A business that is making money - If a business is not really profitable, it is probably only worth its assets. There can be exceptions for a business that has a recognizable brand presence in the market place, however people seldom purchase unprofitable businesses.
2. Reoccurring revenue - Responsible buyers must be sure of a regular income in the proposed business. This requires a history of sales ideally containing a number of different revenue streams. In other words, the business is not dependent on one source of sales.
3. Growth potential - Imagine you are buying a business. Chances are you would want one with prospects of continuing growth, not a stagnant or declining business. Many businesses fail to sell because the current owners are unable to demonstrate their possible future growth patterns. You need to sell the dream, not just talk about it.
4. Owners who haven't given up - When owners take their foot off of the gas in their business and sales are stagnant or start to decline, the business loses value. It's hard for new buyers to understand why sales are flat or declining. Saying that you haven't been focused, just won't cut it with a bank. Buyers tend to walk away from businesses that have declining sales.
5. Business systems - Successful businesses have implemented systems ensuring that the owner is not solely responsible. There needs to be sensible documented procedures enabling employees and new owners to understand what needs to be done and when. There should be documented systems for everything from paying the bills to closing the doors at the end of the day.
6. Diversity - If a business has one contract, one customer, one supplier, one type of employee, there is a problem. Functional businesses have a diversity of revenue streams, customers and employees so they can thrive year after year.
7. A business not a job - Nobody really wants to buy a job, because that just sounds like more work for less pay, which is usually the case in many businesses. Businesses that are not able to show that owners will make more than they would working for someone else are really difficult to sell.
The reason that businesses are hard to sell is usually a combination of the challenges listed above. Ensuring that a business is ready to sell takes years to prepare. Once you understand clearly what buyers are looking for it is easy to set yourself apart from those sellers who have just "put their business on the market." Creating value in the minds of the buyers takes preparation and often several years of groundwork.
Fifty-five per cent of businesses are going to transition to new owners or close down in the next decade. Closing down is a poor option if you indeed have something valuable. Commercial real estate agents would love to help you sell your business but you must prepare to sell long before you list.
Dave Fuller, MBA, is a business strategist and coach. He is the author of the book Profit Yourself Healthy and has sold several of his own businesses. Email [email protected].
