What’s Wrong With This Business?

I am thankful to be among our industry’s most successful Business Brokers and one key to my success in unlocking the highest value for my clients is addressing buyer concerns. Successful brokers can anticipate and provide accurate answers to questions posed by serious prospective buyers. Uncovering the facts is part and parcel of our profession and because most buyers are first-time buyers it is especially important that we understand how businesses operate within the backdrop of where the business is in the business life cycle, especially when discussing why a business’ revenue performance declines over certain periods.

Buyers of businesses tend to be predictable in the questions that they pose. Experienced buyers view a business in its entirety during their evaluation to dig deep to understand the value drivers, trends, market position, competitive landscape, and revenue performance. All businesses grow at different rates for a variety of reasons: these growth rates are not always positive and never in a straight line. New, or first-time buyers tend to be very myopic in both their initial and early evaluations making snap judgements based on their perceptions rather than underlying facts. This kneejerk reaction results in first-time buyers overlooking both good and great businesses as they set their sights on the perfect business. They pass judgement based on assumptions.

One of the most predictable questions from first-time buyers comes after reviewing the financials of a long-established business where revenues have declined not just over one of the past 3 or 4 years but a steady decline over recent years.  It is a great question and one that needs to be thoroughly addressed by the broker in the light of day with an honest answer. Novice Business Brokers hem and haw trying to address the question ‘what’s wrong with the business, its revenues are declining’. They gin up excuses to protect the perceived ‘integrity’ of the business owner rather than sharing the real reasons for the decline in revenue. Brokers want to preserve the image of the business owner to protect their relationship and shy away from saying anything negative about the owner. In short, these brokers forget the goal and in doing so many times they are unable to bring a transaction to a successful end.

The focus of our business brokerage practice is on the sale of Baby Boomer-owned businesses. While I do not want to give away the ‘secret sauce’ for our success I will simply say that we like businesses which have been around for decades, have an established brand, have a team in place, have processes and procedures documented, and have strong and clean documented financials. In a nutshell, an organization that knows How to Value A Business when it comes to getting into an M&A deal. Of course, there’s more, but as I said I can’t provide our secret sauce.

It’s important to understand that businesses have a business life cycle. All begin with the founding of the business aka the Start-up year(s), the early, or Building Years, the Growth Years, and all too often what I call the Flattening or Coasting Years. It’s critically important to remember when looking at businesses for sale in the small business segment (revenues between $100,000 and $25,000,000) that with the exception of uber-successful businesses which experience rapid revenue growth which may even lead to a public offering, the majority of businesses were started to provide an income for the founder and their family. They are not operated as publicly traded companies which must grow for the benefit of their shareholders. They operate to provide an income. If they are lucky and have the inclination for growth it is usually due to the leadership of the founder. In addition to providing an income for the owner it is reasonable that they will take some time for a vacation or two and begin to enjoy the fruits of their labor. The fruits of their labor may take the shape of new cars, a larger home, perhaps a second home, or extended vacations. In most cases the owner is enjoying the fruits of their labor by easing up on the gas pedal and working a lot less than they did in the Start-Up and Growth Years. This is an important distinction in comparison to publicly traded companies which bring in new talent to lead ever more complex businesses to achieve the growth year on year. Small businesses grow at the whim of the owner.

Therefore, it is not unrealistic to understand that business owners who have sacrificed early to enjoy more time off and ride the income wave that they have created. It’s hard to argue they have earned it.

What happens when the owner begins taking more time off or simply coasts along enjoying the ride? Growth tends to slow or cease altogether. The adage ‘if you are not growing you are falling behind’ is never truer when it comes to a maturing business under the leadership of an aging owner who is closing in on retirement. Many times, they slow their investment in sales, marketing, technology, and people with the idea that their customers will continue to patronize them because they have always patronized them. The business owner answers to only themselves – which is in large part why they started the business in the first place. Who can argue with that? Not I.

Buyers looking at an established business whose growth has slowed or even ceased need to understand that the business may indeed be sound – especially if it has the other attributes mentioned above (brand, process, procedure, team, and financial documentation) that there is nothing wrong with the business.

What’s wrong with the business? It’s the owner!

All the buyers know How to Value a small Business and, are accordingly looking for a business which they can improve. Oftentimes they feel (correctly at times) that a significant capital investment will ensure that the business will grow and is the most important requirement for growth. In doing so they overlook the most important piece of the puzzle in every business success story. It’s the leader.

The next time you are evaluating a business where the revenues have declined, sit down with the owner and ask how their role and their activity has changed over time.

I think that you will find your answer and many times it’s not ‘what’s wrong with the business’, the answer is: it’s the owner.

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.