Recent information shared by my US-based brethren suggests that only a minority of businesses they work with ever find a buyer. The actual figures vary per advisor and are heavily influenced by their current economy, location, industries serviced and size of business being sold, however the clear lesson from this discussion is that there are common characteristics across almost all of the failures:
1. Price Too High
The first of these, and probably the most common, is the business owner’s sale price expectations. The vast majority of business owners have never sold a business before, so have no personal experience upon which to draw. As such, they reach out into their trusted network of advisors, friends and family members to get some sense of what they should expect. Unfortunately, the advice given is so often not reflective of reality. The business owner then rails against the M&A professional who is in the trenches every day dealing with the market, and who does not concur with the ill-conceived advice given by others. The owner demands a higher listing price, and potential buyers pass over the opportunity.
2. Business Not Ready
Prospective purchasers of small businesses in particular are taking on a high degree of risk, particularly in situations where the current owner is the key driver and knowledge base of the enterprise. When a business is placed on the market and the risk profile of the business is too high, potential buyers will either demand a price to match the inherent risk or ignore the opportunity completely.
3. Availability of Finance
With the credit markets still tight, Bank finance for business acquisitions is still difficult to procure, particularly where there is little in the way of tangible asset backing. Despite the prevalence of private equity and mezzanine finance funding – and the appetite for deals of such providers – most SMEs cannot tap this source due to scale and deal structure. The other options – vendor finance and earn-outs (vendor finance in disguise) – often do not appeal to the business owner due to the perceived risk inherent in these arrangements. As such, if a business is not a solid enough proposition to give confidence to would-be financiers, it will most likely fail to sell.
4. Poor Growth Prospects
Apart from minimising risk to ensure a business’ sustainability, acquirers are more often than not seeking opportunities to grow. This is motivated by a desire to recoup their initial investment as quickly as possible – either through synergy savings, cross-selling opportunities, or additional resources – and to achieve a longer-term return on investment that far outstrips that achievable through other asset classes. Often, a business buyer is looking to build considerable value into the acquired business in medium-term before executing their own exit strategy and realise this increase in value. So if a target demonstrates little in the way of growth opportunities, it will not hold much appeal for potential acquirers.
5. Low Return On Investment
One of the aspects of SME divestments that I find most business owners fail to appreciate is that a privately-owned business is, in the eyes of a buyer, simply a potential asset in a wide variety of asset classes. Investors make decisions based on return relative to risk, liquidity, ability to achieve leverage, capital growth, income streams and other key considerations. A privately-owned business, in order to attract the private or corporate investment dollar, must stack up against other available options.
How to ensure your business is one of the minority
It is unlikely that habits of a lifetime will change for the majority of business owners. Despite the mounting evidence of a looming shortage of liquidity for privately-held businesses – i.e. most business owners will not be able to find a buyer when the time comes – most will continue to seek uninformed or irrelevant advice from those close to them, ignore the need to prepare for sale well in advance, refuse to accept creative financing structures, fail to chase growth and scoff at the idea that buyers probably would not find their business an attractive asset.
So if you want to be one of the few, do exactly the opposite:
- Get good advice from those qualified to give it;
- Prepare your business for sale, minimise the risks, maximise opportunities and fully understand and appreciate buyer motivations; and
- Build the business so that it will have a broader range of finance options.
Remember, the definition of insanity is to keep on doing the same thing and expecting a different result.