I recently gave a talk to a commercial real estate association. They asked me to talk about how they could sell more listed businesses. During the presentation, I asked them what percentage of businesses that are listed are actually sold. The response was “very few.” I wasn’t surprised.
Not only is it hard to sell your business, it’s harder to get a good price. The reason is that most business owners don’t actually understand what makes a valuable business. They think a business is valuable if it’s making money. That’s not correct.
The truth is that most business owners aren’t selling a business, they’re selling a job. In order for a business to be valuable, the buyer must see the value. So how do we enable them to see the value?
Buyers want a number of things:
- A business that’s making money – If a business isn’t really profitable, it’s probably only worth its assets. There can be exceptions for businesses that have recognizable brand presence in the marketplace, however people seldom purchase unprofitable businesses.
- Reoccurring revenue – Responsible buyers must be sure of a regular income in the proposed business. That requires a history of sales, ideally containing a number of revenue streams. In other words, the business is not dependent on one source of sales.
- Growth potential – Imagine that you’re buying a business. Chances are you want one with prospects of continuing growth, not a stagnant or declining business. Many businesses fail to sell because the owner is unable to demonstrate its possible future growth patterns. You need to sell the dream, not just talk about it.
- Owners who haven’t given up! When owners take their foot off of the gas in a business and sales are stagnant or start to decline, the business loses value. It’s hard for new buyers to understand why sales are flat or declining. Saying that you haven’t been focused just won’t cut it with a bank. Buyers tend to walk away from businesses that have declining sales.
- Business systems – Successful businesses have implemented systems ensuring the owner is not solely responsible. There needs to be sensible, documented procedures enabling employees and new owners to understand what needs to be done and when. There should be documented systems for everything from paying bills to closing the doors at the end of the day.
- Diversity – If a business has one contract, one customer, one supplier, one type of employee, there’s a problem. Functional businesses have a diversity of revenue streams, customers and employees so they can thrive year after year.
- A business not a job – Nobody really wants to buy a job because that just sounds like more work for less pay, which is the case in many businesses. Businesses that aren’t able to show that owners will make more than they would working for someone else are really difficult to sell.
The reason businesses are hard to sell is usually a combination of the challenges listed above. Ensuring that a business is ready to sell takes years. Once you understand clearly what buyers are looking for, you can set yourself apart from those sellers who have just put their business on the market. Creating value in the minds of buyers takes preparation and often several years of groundwork.
Fifty-five per cent of businesses are going to transition to new owners or close in the next decade. Closing is a poor option if you have something valuable. Commercial real estate agents would love to help you sell your business but you must prepare to sell long before you list.
Troy Media columnist David Fuller, MBA, is a certified professional business coach and author who helps business leaders ensure that their companies are successful. David is author of the book Profit Yourself Healthy.
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Tags: Business management