Bizbuysell.com reports 45,000 business for sale listings and a record number sold for 2017, a total of 9,919. This’s 22% of the listings sold, that also means that 78% of the Businesses advertised for sale did not sell! Recent articles by Forbes, NY Times, Inc. magazine also confirm that 4 out of 5 businesses for sale never ever sell or change hands. Most wind up being liquidated, closed down and Billions of dollars in sweat equity vanishes. Most of the businesses in these studies had <$500k in SDE (Seller's Discretionary Earnings) Those with >$750k of SDE have a 4 in 10 chance of selling and Businesses with > $1mm in EBITDA (Earnings Before Interest Taxes Depreciation and Amortization) are in demand and have an 80% chance of selling.
Why do so few Businesses for sale actually sell?
There can be dozens of reasons why a business never sells; below are some of the most common:
1. Priced too high, no justification for the price (no basis for asking price) Businesses for sale with a 3rd party valuation are 5 times more likely to sell.
2. Business acquisition cannot be financed. (Buyers want leverage, Sellers want to cash out)
3. Poor record keeping (tax returns, sellers do a good job of burying income, buyers cant find it).
4. Not packaged correctly. Need to explain full value of the company in writing.
5. Sellers won’t sell for what they make in a few years. (what is the seller's motivation?)
6. Business and accounts are too dependent on seller. (the business owner does everything).
7. Desirability (owners responsibility and hours required to operate successfully are too burdensome for most buyers that want to maintain a quality of life).
8. Management and employee not staying after the sale (mostly family owned, family run).
9. Outdated or changing service and/or product (i.e., Uber, Amazon infiltration into segments).
10. Too much working capital required. (not enough cash on cash return to justify risk for buyer)
The first step for Businesses owner with less than $750k in Seller's Discretionary Earning (SDE) and is thinking about selling is to look at the Direct Market Data Method (DMDM)
This assumes an “Arm’s Length” transaction. Direct Market Data Method (DMDM) relies on the principle of substitution. A buyer will not pay more than the price at which they can obtain an equally desirable substitute. The DMDM uses parameters of comparison in the form of income multipliers, which can be either Gross Net or Sellers Discretionary Earnings SDE.
This is not the end all for valuation but rather a starting point to gage the market. If you dont have a buyer for your business and you want to sell, you will be going to market to sell your business. One of the main principles in market pricing is the “Principle of Substitution”. This principle says that the maximum value of a business or property usually is established by the cost of acquiring an equivalent substitute business or property that has the same use, design, and income. In other words, “why would a buyer pay Y for what you seller when they can buy a similar X for for less? It is important to have market data if you are going to the market to sell. Privately held Business sales are not in the Public Record, your Business Broker has to belong to Business Broker Associations and or subscribe to very expensive private data bases of sold business in order to take the market approach into consideration.
Why should you interview several business brokers?
Questions to ask;
How long have you been a Business Broker, how many businesses have you sold? How many like mine? What else do you do for a living or is business brokerage your full time occupation? This is important because in my experience, most business broker are part time in the business and these types of sales are complicated and require a full time effort.
Are you licensed and what Associations do you below to and which certifications do you have? This will let you know if they are professionally trained and adhere to standards of ethics that associations such as the IBBA have.
How many listings do you currently have and how many of your listings did you sell last year? This is important because many “top producers” have 50 to 70 listings but only sell 10 to 15 per year. That means that most of their listing engagements dont sell and they may be using your listing for advertising “bait” and switch the buyers to other brokers listings that are more salable.
Do you have reviews, letters of recommendation, people I can call who you have sold their business?