Selling a business is a complex and lengthy process, so there are many factors which can cause a business to fail to sell. In our experience, the most common reasons why a business fails to sell are the following:
- Poor reporting, either financial or operational
- Lack of, or a limited management team
- Lack of processes in the business
- Limited customer diversification and customer contracts
This is why carefully planning and preparing for a business sale is essential if you want to achieve a positive outcome.
At Nash Advisory, we have a comprehensive process for selling a business which covers everything from preparing your business to finding the right buyer.
Reasons for a business failing to sell
When an owner decides it’s time to sell their business, many believe that because the business has strong financials, such as more than $5 million in profits, that they will have no trouble attracting interested buyers. Often this is not the case. Buyers tend to look much deeper than just financials.
Sellers tend to be much more sentimental about their business and can assume that it's unique even if it isn't. Buyers, on the other hand, tend to think differently because they are looking for the best value. Buying a company is a long, hard, expensive, and time consuming process, so making it easy for a buyer to interact with your business sale process is vitally important.
In our experience, these 'deal impediments' listed above can be rectified if properly planned in advance of a sale. A good management team will get things done and move to the next problem, issue, or opportunity. There are many quick wins available to owners in the months leading up to a sale, but someone has to actually execute these.
When a buyer is interested in a business, typically their first few questions will be around the financials. This is always a hidden test for most companies because the majority of owners believe they have great financials, and this is often not the case.
Most private companies have generally poor or very basic financial reporting. Once a buyer puts forward a request for information, the assumption is that this data should be readily available within a week or so. The longer the data collection takes, the more likely the interested parties will see the business has a lack of reporting on key metrics of the business, and decrease the business valuation.
The solution – 6 to 12 months prior to a business sale, you need to engage with your business adviser to decide on the key areas of the business that a buyer will require information on during a sale. Once you know what's important to buyers, you can make sure you have detailed reporting processes in place to accommodate a buyers request.
Lack of processes
This one doesn’t always come up in due diligence, but it is clear when a buyer spends time in the organisation whether there are effective processes in place or not. A buyer wants to know the day they take over, the systems within the business will continue as they did under the stewardship of the old owner.
To facilitate this, any business knowledge or processes, that an owner may just do on their own, need to be properly documented and followed by staff. This can range from payroll, accounts receivable, inventory management, or contract administration procedures.
The solution – 6 to 12 months prior to a business sale, key processes should be put in place and documented. These start with clear Job Descriptions and organisational charts, so staff understand their role clearly. After that, processes can be developed so that everyday tasks become more efficient.
Typically, buyers want to see customer contracts with key customers. While you may trust that a customer will continue as normal after the business sale, buyers will need a stronger guarantee to avoid business failure following the sale.
The solution – In the months prior to a sale, the owner and management team should be meeting with key customers and setting out long-term contracts or agreements with their top 10 customers. Ideally, these agreements should also allow for easy 'assignment' to any new owner.
Get expert business advice
The reasons for a business failing to sell can vary widely, so you need to prepare adequately to ensure your business is in the best possible position when it comes time to sell.
Find out how we can help you prepare and execute a successful business sale.