Why Some Businesses Don’t Sell

You have taken all the necessary steps to prepare your business for sale but you would like reassurance that your business will, in fact, sell. Why don’t some businesses sell? And what can you do about it?

Let us count the ways …

Based on my 20-plus years of experience at Morgan & Westfield, when deals die it usually occurs during one of the following four stages:

• Marketing: Sometimes deals never get off the ground because we can’t get the traction necessary to generate meaningful discussions with buyers.
• Offer: We have sparked interest but once potential buyers look at the business they lose their appetite.
• Due Diligence: The buyer makes an offer but for a variety of reasons the deal dies during due diligence.
• Closing: The buyer successfully concludes due diligence but the deal dies before the closing.

There are numerous reasons a deal may never make it to closing. In the section that follows, I examine and analyze more than 25 real-world case studies from past clients whose businesses did not sell. Reviewing these examples will give you insight into the salability of your own business, along with steps you can take to help ensure your company does sell when you decide to put it on the market. 

These are some of the specific reasons businesses have not sold that we have encountered over the years at Morgan & Westfield:

• Rural Location: The business was located in a small, rural market in Indiana and there was not a large enough buyer base in the town to generate sufficient activity. The area was also not attractive enough to entice outsiders to relocate there. This business could not be relocated to another locale and no companies would consider acquiring it due to the difficulty of hiring a talented manager in the area to run the business after the acquisition.
• Niche Business with Limited Buyer Pool: This business was in a niche segment in the construction industry and required a specialty contractor’s license that few individuals possess. Most individuals holding the license already owned a business, and we could not generate any buyers that had the license and were open to the idea of buying a business.
• Business Easy to Replicate: A service business was considered easy to replicate by most buyers, so none felt an investment in the company was justified due to the ostensibly low cost of replicating the business. Moreover, the business depended on a strong sales team, there were no processes or elements of the business that were considered proprietary, and there was little documentation in the business.
• Risky: This business was considered too risky due to the recent entry of venture-backed competitors into the industry. As a result, no buyer was willing to make an offer.
• High Growth: One business was growing at a rate of 30% per year. Buyers were only willing to buy the business based on the historical earnings, but the owner wanted to be paid based on the next 12 months’ projected earnings and was not willing to consider an earnout.
• Unattractive Industry: An industry was considered unattractive by many buyers due to the emergency nature of the industry. Our marketing activities for this business generated few results, despite multiple iterations of our marketing campaigns.
• Low Revenue: In this instance, our marketing activities generated few results because the business generated little revenue and cash flow. While the business was attractive and the products were proprietary and patented, no buyer was willing to take a look. Their thought process likely was: “Why does the business generate so little revenue if the products are so great?” The truth was that the owner unsuccessfully tried to raise venture capital and had no capital to invest in marketing. However, buyers never had a chance to hear this part of the story because they immediately dismissed the business due to the lack of revenue. 
• Low Profitability: This business was break-even. Our online marketing efforts yielded poor results because buyers immediately dismissed the business due to its lack of profitability, and the company could not feasibly be sold to a competitor.
• High Customer Concentration: One customer generated over 80% of the revenue for this business. Despite the fact that the customer was bound by a long-term agreement, no buyer was willing to take the risk inherent in such a high level of customer concentration.
• Landlord Raised Rent: One retail business was highly successful so an opportunistic property manager, who represented an aggressive foreign landlord, attempted to raise the rent by 30% for the new buyer. The buyer balked and walked away.
• Franchisor Changed Terms: We received an offer on a franchised business and the owner accepted. The franchisor informed the buyer that they were increasing the minimum revenue threshold for each territory, which effectively served to decrease the territory size. The buyer thought that eight territories were included in the sale, but after the change, the buyer would only receive two territories. The buyer walked – and we don’t blame them. Now, this is a common issue. Many franchisors grant territory sizes that are too large when they initially start franchising. They claw back some of these territories several decades later when the franchise becomes successful and they begin running out of territories.
• Inaccurate Financials: A buyer made an offer on this business. Then, the buyer discovered multiple inaccuracies in the financial statements during due diligence. The buyer attempted to clarify the inaccuracies with the seller’s accountant but the accountant was unable to sufficiently assuage the buyer’s fears. The buyer walked.
• Personality Conflicts: An offer was made and accepted. Due diligence began smoothly. However, personality conflicts between the buyer and the seller developed and gradually grew out of control. The parties became deadlocked on several issues and both refused to budge. The issues mounted to the point where the deal finally died.
• Revenue Declined: For one business, the revenue declined by 10% between the time the business was put on the market and the time due diligence was complete, but the owner was unwilling to lower the price. The revenue decline implanted fear in the buyer, however, the seller was unwilling to attempt to pacify the buyer and offer a price reduction, which we consider fair in the event of a revenue decline. As a result, the buyer walked.
• Unattractive Franchise: Our marketing efforts for this business yielded several interested buyers, however, as each buyer dug into the details of the franchise, they walked. Several of these interested buyers told us that turnover in the franchise was excessive. (Turnover must be disclosed in “Item 20” of the Franchisor Disclosure Document.) They talked to several franchisees in the system and new ownership at the franchisor was considered unfavorable, so the deals died.
• Minority Partners: We put a business on the market, successfully generated several buyers, accepted an offer, and began the due diligence process. The owner then contacted us and told us that their minority partner was demanding a 200% premium for their minority share of the business. The owner refused to give in to the demands of the minority partner and the buyer subsequently walked.
• Economy: During the 2007 to 2009 recession, we had dozens of deals die, either during the marketing stages, before, or after an offer was made. Some businesses were severely impacted by the state of the economy and other deals died due to the uncertainty the economy created in the eyes of the buyer.
• Industry: We had a business for sale in the consumer goods industry. Recent changes in the industry related to consumer preferences were expected to have a negative impact. A buyer made an offer on the business and the seller accepted. However, as the buyer performed their due diligence, it became evident that the impact of changes in the industry was uncertain and difficult to predict. As a result, the buyer retracted their offer.
• Competition: We had a technology business for sale that generated significant buyer interest, as is usually the case for tech companies. During the process, it was reported that one of their major competitors had received a large capital injection from a venture capital group. The buyers became apprehensive and downgraded their valuation of the business, which the seller was unwilling to accept.
• Lack of Preparation: We had a construction-related business for sale that seemed like a promising investment for a buyer in the industry. We successfully marketed the business and subsequently accepted an offer from a competitor. During due diligence, the buyer uncovered numerous defects in the business that could have been prevented with proper preparation. Some of these defects included inaccurate financials, a lack of proper insurance, no tax planning, lack of approval from a minority partner, and no agreements or retention plan with key employees. The transaction ultimately fell through due to a lack of time invested in preparing the business for sale. 
• Third-Party Delays: We received an offer for a service-based firm in the Midwest. The seller accepted the offer and the buyer began due diligence. During due diligence, the buyer noticed several inconsistencies in the financial statements. The seller forwarded the questions to their CPA, but two months later the questions remained unanswered and the CPA was generally unresponsive. As a result of the delays, the buyer walked.
• Lack of Bank Financing: We received an offer on a specialty manufacturing business. Due diligence was successful. However, the buyer was unable to obtain financing and did not have an adequate down payment for the seller to consider financing the sale.
• Owner Unwilling to Finance: A buyer made an offer on a large business in the healthcare industry. The offer included a 50% cash down payment but the seller was unwilling to finance more than 20% of the purchase price. You guessed it: the offer was not accepted.
• Asking Price Too High: We performed a valuation on a technology company and valued the company at approximately $1.5 million. The owner believed his company was worth $2.0 million to $2.5 million. We attempted to market the business at $2.5 million, but generated little response. Revenue then declined, which reversed a positive trend in the business, and the owner dropped his price to $2.0 million. We downgraded our valuation to $1.3 million due to the recent decline in revenue, but the owner chose not to drop the price. As a result, we received negligible buyer interest.
• Dependent on Owner: We represented a professional services firm and received significant buyer interest in a short period of time. However, as most of the buyers dug deeper, they discovered that the owner was inextricably tied to the business and determined that a transition would be too difficult, costly, and risky. Most of the clients were close friends with the owner and the name of the firm was tied to the owner’s name. However, the owner wouldn’t allow a buyer to use the company name moving forward. Therefore no buyer was willing to make an offer despite the high cash flow and an attractive price.
• Family Involved in Business: Multiple family members were involved in a business we represented in the service sector. Our marketing efforts generated several interested buyers. However, every buyer that dug deeper into the mechanics of the business discovered there were several family members involved in the business who were instrumental to operations. The family members’ compensation was not at the market rate and no family members were willing to stay past the initial transition period. As a result, buyers considered it too risky to replace the owner and the spouse, as well as two additional family members involved in the business.
• Key Employee Dependency: In another transaction, a valuation was performed on a business in the online education space. An offer was received and the buyer began performing due diligence. During due diligence, the buyer discovered that two employees were instrumental to the operations of the business. Against our advice, the seller allowed the buyer to talk to the employees to ensure they would be retained. However, the employees demanded an increase in salary that was far beyond what the buyer considered reasonable. The buyer walked.
• Employees Fail to Cooperate: An offer was received on a commercial landscaping business. Once the employees received news of the offer through indirect sources, they felt slighted and were determined to derail the deal. Despite the seller’s attempts to pacify the employees, their resentment could not be contained. Once the buyer received news of the lack of cooperation from the management team, they rescinded their offer.
• Tax Returns Unreconciled With Financials: An offer was accepted on a roofing company and due diligence uncovered disparities that could not be reconciled between the financial statements and federal income tax returns. The differences could not be explained, so the buyer downgraded their offer, which the seller was unwilling to accept. Upon the advice of their CPA, the buyer walked.

As you can see from the examples, there are a wide variety of factors that can cause a business to not sell. While some of the factors are unpreventable, many of them can be prevented through proper preparation. 

Keep in mind the factors I have mentioned can also occur simultaneously. For example:

• The business can be located in a rural area.
• The business can be in a niche field with a limited buyer pool.
• The business may not be pre-approved for bank financing.
• The seller may not be willing to finance a portion of the sale price.

While some factors can be overcome, buyers often consider the totality of the circumstances. The more risk for the buyer, the more likely they are to walk away from a deal. The more risk factors that are present, the more nervous the buyer will become and the less appetite they may have for risk.

Conclusion

If you are serious about selling your business and would like to maximize its value, you should prepare for the sale as early as possible.

Hire a third-party expert to perform an assessment of your business to help you identify and mitigate any risk factors well before you put your business on the market. At Morgan & Westfield, for example, our assessment of a business includes the following:

• Evaluation of the salability
• Identification of risk factors
• Determination of potential deal killers
• Creation of a comprehensive plan to help maximize the value of the business
• Exploration of multiple exit options for a business owner
• Review of the business’s financial statements 
• Establishment of a value range for the business from low to high

Many problems can be prevented if you give yourself ample time to prepare your business for sale. Even if a problem can’t be completely eliminated, it may still be possible to mitigate the effects of the problem so that you can provide reassurance to a buyer. 

The list of potential problems may seem overwhelming. However, an experienced expert in the business marketplace will have developed the ability to quickly identify patterns and can help you identify and mitigate any potential deal killers in your business. This can ultimately help ensure a successful sale and dramatically improve the value of your business. 

Once you’ve prepared your business for sale, it’s time to have it valued. That’s the subject of the next chapter.