Preparation. This one can take years in the making, so if you're thinking about selling your business, the time to start was yesterday. Many people up and decide to sell their business one day but truly don’t understand if their business is ready to sell or if they are ready to sell. These are two very different things.
A little secret… a good business is a sellable business and a sellable business is a good business These two businesses are one in the same and a good business is what buyers are looking for. If your business has clean financials with growing margins, documented processes that your team is actually following, low customer concentration, and in a growing industry… congrats you’ve not only built a company that works for you, but one that other people would like to work for them.
The next question then becomes are you actually ready to sell yourself. Only you can answer that question, but a few impactful questions can really help with that so instead telling you all about it, I’ll just ask you some questions (PS - these are also in our Seller Ready Questionnaire)
Why do you want to sell your business now?
Who are you when you’re not the owner of this business? Answer this without mentioning the company
What does life look like after the sale? After a period of rest and relaxation, do you have a place to put your time and energy?
What are you willing to do to get the deal done? Seller financing? Staying on for 2 years? A price below your number?
These are a few of the important questions that often get overlooked during the sale process, but these are the things we should be thinking about before even getting started.
So, are you and your business ready to sell?
The Owner Runs…. Everything. This already got a mention above, but it's really worth pulling the string further. This can be a deal killer and when talking to most buyers, they are going to run for the hills when they see the owner is the bottleneck in the business. Business owners doing $250,000 to $2 million in SDE often don't have an operating model for their business where processes are documented (and followed), decisions can be made without them, and customer relationships are held by the folks working in the business.
As small business owners, sometimes it can feel like everything is happening all at once, and there's no time for documenting processes and coaching our employees to effectively carry those out. But the fact is, that’s how you get your business from running you to you running your business and buyers want to see that not every action in the business has to go through you first.
They also want to see that you have the right people in the right seats who you trust to make decisions in the business without your input. If all decisions must go through you, then that is a business that is not primed for growth and constrained by one person. Not an ideal situation for a buyer.
Lastly if you hold all the customer Relationships, then, effectively, those customers walk out the door when you do (that’s the risk anyway). Buyers want to see those relationships transferred to the people working in the business so they can be sure the same customers are there after close.
Pricing Expectations. I get it. This is your baby. You started this business 10, 20, 30, or more years ago and have worked every day to build it into what it is today. You know your accountant, operations manager, and salesperson, are some of your longest friends and you’ve maybe even watched their kids grow up. It's hard letting your business baby go, and you deserve a high price for it, right?
Well, as they say the '“market get’s a vote” and many business owners over value their businesses based on what they believe or what they’ve heard from their friend who sold her business across town.
Business buyers looking at companies making $250K - $2M in SDE are usually individual buyers ($2M is about the place where PE can start sniffing around) and those buyers are typically utilizing debt to acquire your company. Long story short… they have to meet cash flow and debt service hurdles, otherwise, this story doesn’t end well and the people that worked for you all those years no longer have a job. So understanding your buyer, what the market is truly paying, and what you are happy with are key to getting your deal to the closing table.
Faulty Financials. Document. Document. Document. Buyers, lenders, and quality of earnings providers (especially) must have a clear path from tax returns to P&L’s to SDE. Otherwise the price you were comfortable with and thought you could justify no longer holds weight.
Buyers and lenders are going to scrutinize your financials and your tax returns. If you've been taking legal tax deductions shown on your tax returns (as you should) those questions are going to need to be answered to verify a higher price. Buyers are going to ask, and the tax returns must be trackable back to your P&L's, and add-backs in order to justify the higher price.
In addition, buyers are going to review every line of your financials, trace payments, invoices and add backs. This will all likely be reviewed by a bank's chosen QofE provider. The QofE is often the first things buyers/banks will order post letter of intent, and it kills the majority of deals because the numbers don't stand up to what the owner was claiming in the beginning of the process. Smart owners have 3+ years of clean documented CPA verified numbers that can stand up to intense scrutiny by buyers and their support teams.
Customer Concentration. Buyers don’t like risk. They are doing due diligence on your company to try and understand how much of it they are signing up for. One thing that can derail a deal is customer concentration. If you have a customer that is 30%, 40%, 50% or more (yes that happens) of your revenue expect your buyer pool to be very small and for the price to go in the opposite direction that you hoped.
A business with high customer concentration is a risky business. I've personally seen and heard of businesses shutting their doors overnight after a main customer leaves them. The scary part is, it doesn't even have to be anyone's fault. Global (Covid), economic (tariffs), and political (elections) events can greatly impact your customers and force them to shut their doors or find another company to work with.
Finding new customers is hard, but if your business is concentrated, consider spending 2 years diversifying your revenue.
So there you have it. Those are the top five reasons that businesses never make it to due diligence or the closing table. The good news is all of these issues are fixable. It may just take some time, tools, and coaching to get you there. If you feel like your business is ready to sell and you are ready to make the leap, let's have a conversation. If not, we still love hearing from you and giving resources to help you get where you’re going faster and on a smoother road.
