Selling a business is not an event, it is a process. Also, not every business sells, even when a professional business broker has applied the best marketing efforts!
Here is a few reasons why:
The business is overpriced
The main driver of a business sale is price. A business transaction is always based on Return on Investment, however good a business is!
There are usually 4 to 5 people that need to sign off on a valuation:
• The buyer him-/herself
• Their husband/wife/life partner
• The financial advisor/ accountant
• The bank
• The solicitor
You can imagine that (even) if one of these will doubt the valuation, there will be a further scrutinizing of the price in a Due Diligence.
Also, while a potential purchaser is looking at your business, they will compare it with probably 4 or 5 other opportunities that are on the market. If the Return of Investment is much lower than the comparable opportunities, you may lose many buyers over time. Being realistic is key to the process.
Advice: Ask the business broker how he derived to the appraised value and ask them to supply support documents that back up the appraisal value
The Business has a very low barrier of entry
Some businesses have such a low barrier to enter the market, it may be more economical to start the business from scratch. Ask yourself; “What am I actually selling?”
If a potential purchaser is considering paying $300,000 for your business, his first question is “If I were to invest $300,000 starting from scratch, where would I be within 2 years time, compared to this business?”.
The obvious upside to buying a business (VS starting a business) is that people already know the business and it is more likely you actually earn money from day one as the business continuous without the need to spend money on huge advertising campaigns to let people know where you are and what you do. The building off a reputation is usually more expensive than buying an existing business.
Businesses usually start having value when you can demonstrate a point of difference, exclusive suppliers or a huge database of actual customers (not a list of people you send newsletters to).
Perception in scale of economy
Some regional areas have the perception that there are simply not enough people to sell your product or service to. Certainly when a buyer is thinking of moving from Auckland to a smaller town, it’s sometimes hard for them to see potential.
Northland still has a bit of that stigma where people think it is a poor area and nobody has money. Whether that though is justified or not (and no it’s not true), if the perception is there, the potential purchaser will need more convincing that the business is worth its valuation.
Advice: Do some research on industry trends, who your customers are and where they live. Find out the size of the market and price the business realistically so the potential purchaser can see some potential growth.
Not having reliable accounts available
This is probably the most frustrating aspect. The owner and business broker both know it’s a good business, but the accounts aren’t reliable. In other words there are a lot of personal expenses that can not be identified, there is cash in the business that pays for non-recorded expenses (security guards and musicians at pubs being paid in cash at bars are notorious for that) or the accounts just don’t reflect a profit where the owner is adamant it is a good business.
Every statement that an owner makes about their business must be true and being able to be backed up by evidence. If the accounts don’t reflect the business it may not get sign off from the bank, or will get a negative advice from the accountant, lawyer
It is perfectly OK to sell a business privately. Listing your business on TradeMe and a bunch of other websites might make perfect sense. However, the larger specialised business brokerages have a database of people that are actively looking to purchase a business.
Most of our enquiries come through marketing to our database daily, where buyers have subscribed to a diverse range of categories and want to keep being updated on a daily basis. They don’t come through the generic websites like TradeMe.
The other trend we see is that often buyers want to deal with a business broker as they can use the advise of a professional broker to their advantage. Business Brokers are licensed under the REAA08 and this protects a purchaser against any false claims that were made by the broker or buyer. Besides that, a good business broker can help find a business that would suit the purchasers’ lifestyle, often when that business has not been marketed yet.
I hope this article gave you some clarity in case you were wondering why your business hadn’t sold, or if you are considering selling (whether private or through a broker).