I am a big believer in telling business owners who want to sell their business the absolute truth about the likelihood of their business selling. We have always had great success in selling ‘good’ and ‘great’ businesses. These are businesses which tend to check all of the boxes buyers are looking for. The following list of reasons why a business is not likely to sell are essentially the opposite of the steps we recommend you if you want to Sell your Business.
- Owner Dependency
If the owner has a unique and critical skill set which their staff cannot perform (think tree surgeon for example) then the success of the business is reliant on the owner. The buyer pool shrinks considerably when the business requires a new owner who has the same unique skill set as the current owner. Solution: train your staff, or a key person to perform these activities. The business owner must make themselves less critical in the day to day operations of the business.
- Financial Record Keeping
Poor financial record keeping is an obvious and all-too-frequent occurrence in small businesses. Accurate and ongoing (historical) record keeping is a must. Ideally the business owner will use an accepted accounting system such as QuickBooks which not only is easy to use but produces an electronic paper trail of income, cost of goods, and expenses. Having started, grown, and successfully exited (sold!) multiple businesses before I became a business broker, I can attest to the absolute necessity of documenting financials over the most recent 3 years. While you might convince a buyer that everything is in order you will never convince a lender.
Solution: purchase an accounting software or online subscription package like QuickBooks and get to work! Begin by going back to January 1st of the current year and enter everything to bring yourself up to date. The reason I suggest starting with this year is that after you have brought things up to date today you will be ready to enter everything correctly tomorrow and into the future. What about the prior 2 years? Get together with your accountant to understand if and how you can put all prior income, COGS and expenses etc into this new accounting system for prior years. Will this be a monumental and painful effort? Yes, it probably will, but understand that without doing this you very well may have an unsalable business. A better idea may be to invest the $5,000 to have your accountant do it for you.
- Management Team
The absence of a right-hand person or manager to manage day to day activities is a recipe for disaster in the minds of buyers. Buyers are nervous about the risk of buying a business, especially when they do not have a depth of experience in the same industry. Ask yourself what would happen if you took 2 weeks or a month off. Would the business be able to continue to operate to perform work and generate income in your absence? I’m not speaking about all the little things that an owner does behind the scenes to keep the ship sailing ahead (bookkeeping, advertising, long term scheduling, etc.), I’m speaking about performing work in your absence. If you cannot take 2 weeks off away from the business entirely then you have a problem. Solution: identify the member of your team who understands the business that you are in, who can (likely) work without direct supervision, and who complete the service to the genuine satisfaction of the customer. Train this person and provide them with more responsibility to the point that you can take time away from the business. Then take a week away and see how things go. If there are problems, then train them to the point that they can manage on their own. If you want to sell your business, you really do not have any other choice.
- Customer Concentration
Reliance on a small number of customers for the majority of revenue presents a significant risk to any business. In cases where one customer makes up more than 25% of revenue buyers will usually move on in their acquisition search. Solution: focus your attention on bringing on new customers even if you must pay a premium via increased commission to your salespeople or a discount to new customers. As in the stock market diversity lowers risk.
- Revenue Growth
Along with poor financial recordkeeping, stagnant or declining revenues tend to be the most significant barrier to attracting buyers who will take a deep-dive into the reasons for the decline. Remember that most buyers are first-time buyers and they make knee-jerk decisions early in their selection process. Solution: turn up your marketing spend and initiate a compensation plan for all employees to earn more by increasing revenues. When I say all I mean not just offering greater compensation for customer-facing staff but also inviting non-customer facing employees the opportunity to share in a bonus pool by identifying ways to increase revenue from existing customers. As always, if you can get everyone in the boat rowing in the same direction you are likely to reap the rewards of increased revenues. Imagine the impact of getting each customer to spend 10% more than in the prior year.
- Process and Procedures
One of the reasons that franchised businesses have tended to be so successful in attracting operators is that franchised businesses provide a playbook for success. While you may think that your business is easy to operate, remember that this is a new world for a first-time buyer and without a map (playbook) to guide them once you are gone, they may feel that the business is too complex for them. Complexity creates doubt and doubt creates perceived risk in the minds of buyers.
- Expense Optimization
Buyers look at both revenue and profit trends when they’re evaluating how to value a small business. Not only small scale, but also the medium to large scale ones. If revenues are not growing, you can still demonstrate operating strength with increasing profits. Solution: begin by listing all expenses from high to low and review each expense to see how you can trim the unnecessary. But beware of trimming marketing and advertising expense, and especially sales compensation. Sales compensation plans, when designed properly drive revenues. Cutting sales compensation plans always results in discouraging those who thrive on the opportunity to increase their earnings. The key to proper and effective expense management is to understand which expenses are necessary to operate the business. Pay attention to expenses which you have control over and can be reduced without impacting revenue.
- Social Media
Like it or not, the public now relies on the court of public opinion to determine who they will call for a product or service. If you want to see how your prospects view your business a simple Google search is the first step. If your business does not turn up in a search, then you can be sure that prospects are not finding you. Simply having a website is no longer enough – you must have a social media presence where customers can leave a review. Solution: If you have no social media presence it is time to become visible! Create and/or update your Google Places page and proactively invite every customer to leave a review. Ensure that all customer-facing staff politely ask customers to leave a review. Gone are the days when asking for a review is perceived as self-serving. People want to see reviews before contacting a business and no matter how good your product or service they will make the decision to call or not call you based on your reviews. In the past, customer satisfaction surveys were expensive and out of reach for small businesses to conduct. Social media has evened the playing field and by reading your reviews you will get an immediate understanding of how your business is perceived by the public.
You must remember that buyers know nothing about your business except what they see from a distance. To successfully attract buyers, it is imperative that you remove as many perceived obstacles as possible to make your business attractive. Just as you look at yourself in the mirror to see how others see you, you must look at all aspects of your business through the eyes of the buyer. If you cannot easily reel off the 5 compelling reasons why someone should buy your business, you are not ready to go to market. Each of the above areas are within your control and can be addressed or implemented today. When it comes to selling a business, it is incumbent upon the owner to prepare their business in such a way that buyers will be confident that they can ride your success and make it their own.
Wondering How to Value a Business?
Rocky Mountain Business Advisors is a business brokerage focused 100% on selling our clients’ business. As Business Brokers, we fathom it as our responsibility to apply a proven process to educate, prepare, and guide our clients through the sales process so that they can focus on managing their business while we focus on a successful sale. We bring a strong sense of urgency and tenacity to every engagement to realize the highest sales price in the shortest period of time. We bring buyers and sellers together. Contact us at 303- 474-5582, https://rockymountainba.com/, or schedule a free 15-minute consultation to learn more about the services that makes us one of the best business brokers in Denver.