Why Do Some Businesses Not Sell?

Jacob Orosz headshot
by Jacob Orosz (President of Morgan & Westfield)

Executive Summary

When deals die, it’s usually for the following reasons:

  • The Economy – Economic issues can sometimes be anticipated if the economy is already in a slump, although conditions can be unpredictable. The riskiest scenario is one in which the economy takes a turn for the worse in the middle of a transaction. The only solution to preventing mishaps due to economic uncertainties is to adequately prepare your business for sale and attempt to sell your business at a peak for your industry.
  • Industry Attributes – Industry attributes can seldom be mitigated. Common challenges include industries with a limited pool of buyers, businesses that are easy to replicate, sudden industry changes (e.g., regulatory, tax, etc.), new competition, or industries that are not considered attractive. Risks related to an industry are usually foreseeable if the buyer is already active in it because they’ll understand the industry dynamics. The only exception is when unforeseeable events impact an industry, such as well-capitalized competition or sudden legal or regulatory changes. The risk is higher when your buyer doesn’t operate in your industry, as they may discover unfavorable information during due diligence that causes them to second-guess their investment.
  • Business Attributes – Most problems related to the business, such as a limited management team, high customer concentration, or dependency on key employees, can be anticipated and addressed in advance of the sale through adequate preparation.
  • Financial Attributes – Most financial challenges can be addressed before the sale by obtaining a quality of earnings analysis (QoE) and selling when the business is doing well financially. Issues usually relate to the quality and accuracy of the financial statements or financial trends in the business.
  • Seller Issues – Many issues related to the seller, such as a lack of emotional preparation or unrealistic expectations, can be resolved in advance, primarily through adequately preparing the business for sale or through educating oneself about the process of exiting.
  • Management Issues – Management issues, such as an over-dependency on owners or family members, can frequently be resolved before the sale, although the majority of management issues take a significant amount of time to resolve and should be addressed well before the sale.
  • People Problems – People problems can often be anticipated and resolved, such as personality conflicts or minority partners who don’t cooperate, although the degree to which this is possible is unpredictable.
  • Third-Party Issues – Challenges related to third parties can be difficult to predict, such as those involving landlords, franchisors, or delays with professional advisors. That said, the potential for problems can often be identified in advance.
  • Financing Issues – Financing issues can’t always be prevented, such as the buyer’s inability to obtain financing or the seller’s unwillingness to carry a note. They can be mitigated by educating yourself about the process upfront and setting realistic expectations with buyers early in the process.
Information Sources

How can you stop deals from dying?

If you’re serious about selling your business and would like to maximize its value, we recommend you prepare for the sale as early as possible.

Hire a third party 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. During our assessments, we do the following:

  • Evaluate the salability of a business
  • Identify risk factors
  • Identify potential deal killers
  • Create a plan to help the owner maximize their business’s value
  • Explore multiple exit options for a business owner
  • Review the business’s financial statements 
  • Establish a value range for the business from low to high.

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

Introduction

Why do some businesses fail to sell? This article identifies all the most likely contributors to deal failure, explores real-world case studies from our archives, and lays out how you can prevent a deal from crumbling. 

Any seasoned M&A advisor has experienced failed deals – the best will learn and incorporate them into effective planning next time around. Reviewing the examples below will give you insight into the salability of your own business and how to stop buyers’ worst fears from coming true. 

When Deals Die in M&A

Most deals die during one of the following stages:

  • Marketing: These deals never get off the ground because we can’t get the traction necessary to create meaningful discussions with buyers.
  • Letter of Intent: We’ve generated interest, but once potential buyers look deeper into the business, they’re no longer interested.
  • Due Diligence: The buyer makes an offer, but the deal dies during due diligence for a variety of reasons.
  • Closing: The buyer successfully concludes due diligence, but the deal dies sometime before the closing.

Case Studies: Why Businesses Don’t Sell

The Economy

At the top of the list are economic reasons. Unfortunately, these can seldom be prevented once the economy takes a turn for the worse. They can sometimes be anticipated if the economy is already in a slump, although conditions can be unpredictable. The riskiest scenario is one in which the economy dips in the middle of a transaction. 

The only solution to preventing mishaps due to economic uncertainties is to adequately prepare your business for sale and attempt to sell at a peak for your industry.

  • Recession: During the 2007-9 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, while other deals died due to economic uncertainty in the eyes of the buyer.
  • Solution: Always be prepared to sell so you can exit at an industry peak or a positive economic climate.

All seasoned M&A advisors have experienced failed deals – the best will learn and incorporate them into effective planning next time around.

Industry Attributes

Industry attributes are another element that can seldom be mitigated. Risks related to the industry are usually foreseeable if the buyer is already active in it because they’ll understand current industry dynamics. The only exception is when unforeseeable events impact an industry, such as new, well-capitalized competition or sudden legal or regulatory changes. 

The risk is higher when your buyer doesn’t operate in your industry, as they may discover unfavorable information during due diligence that causes them to second-guess their investment.

Following are a few cases we encountered in which a deal died for industry reasons:

  • Limited Buyer Pool: Horizon was in a niche segment in the construction industry and required a specialty contractor’s license that few individuals hold. Most individuals with the license already owned a business, and it would be difficult to recruit as managers. We couldn’t generate any buyers who had the license and were open to buying a business.
    • Solution: Develop a plan for the management team to obtain the license before the closing. Implement a retention plan with management to ensure they stay throughout the transition. Management can be the license holder while the buyer obtains their license after closing.
  • Business Easy to Replicate: Nikita-May’s manicure business was considered easy to replicate by most buyers, so few could justify the investment due to the low bar for competition. She depended on a strong sales team, there were no processes or elements that were considered proprietary, and there was little documentation — all making the business appear easy to replicate.
    • Solution: Develop elements of the business that are difficult to replicate, such as proprietary processes or trade secrets, a well-diversified sales team, and well-documented processes.
  • Industry Changes: Recent industry changes related to consumer preferences were expected to have a negative impact on our consumer goods business. A buyer made an offer on the business, and the seller accepted, but as the buyer performed their due diligence, it became evident that the impact of those changes was uncertain and difficult to predict. As a result, the buyer retracted their offer.
    • Solution: Develop value in your business that’s difficult to replicate, and that is desired by other businesses regardless of the state of your industry. Examples include long-term contracts with buyers, strong customer relationships, or trade secrets. The more susceptible your business is to change and adverse conditions, the less desirable it will be to buyers.
  • Risky Industry: An industry was considered excessively risky for every buyer due to the recent entry of venture-backed competitors, so no buyer was willing to make an offer.
    • Solution: Stay in tune with industry news and always be ready to sell your business and if you feel it’ll face disruptive innovation or intense competition. The sooner, the better, as new competition is sometimes dismissed by buyers until they gain significant market traction.
  • Competitive Industry: A technology business generated significant buyer interest, as most tech companies do. During the process, one of their major competitors received a large capital injection from a venture capital group. Once this news reached the buyers, they became apprehensive and downgraded their valuation of the business, which the seller was unwilling to accept.
    • Solution: Develop a differentiated business model that is difficult for others to replicate. If possible, never let your product or service become a commodity. 

Develop elements in your business that are difficult to replicate, such as proprietary processes or trade secrets, a well-diversified sales team, and well-documented processes.

  • Unattractive Industry: An industry was considered unattractive by many buyers due to its auxiliary nature – the owner was often called into last-minute emergencies. Our marketing activities generated few results despite multiple iterations of our marketing campaigns.
    • Solution: Develop a strong team and processes that insulate the owner from last-minute emergencies. 
  • Unattractive Franchise Model: Our marketing efforts yielded several interested buyers, but as each dug into the details of the franchise, they walked. Several buyers told us that turnover in the franchise was excessive (turnover is disclosed in ‘Item 20’ of the Franchisor Disclosure Document). They talked to several franchisees in the system who didn’t have favorable comments regarding the current management, so the deal died.
    • Solution: Few solutions are available in this situation other than new terms with the franchisor, such as a buyout of the franchise system.

Business Attributes

Following are a few cases we encountered in which a deal died due to attributes related to the business, most of which can be anticipated and addressed in advance:

  • Limited Management Team: A business was located in a small, rural market in Indiana and had a limited management team that was heavily dependent on the owner. The area wasn’t considered desirable enough to entice outsiders to relocate, and there wasn’t a sufficient buyer base in town to generate interest. The business couldn’t be relocated, and no companies would consider acquiring it due to the difficulty of hiring a talented local manager to run it post-sale.
    • Solution: Build a strong enough management team that can run the business without you remotely and can be sold to a buyer outside of the local geographic area.
  • High Customer Concentration: A single customer generated over 80% of the revenue for this business. Despite the customer being bound by a long-term agreement, no buyer was willing to take the risk inherent in such high customer concentration.
    • Solution: Address customer concentration issues several years in advance of the sale. Such changes may require dramatic changes to your business, and sufficient time is required to solve such issues.
  • Key Employee Dependency: A valuation was performed on a business in the online education space. An offer was received, and the buyer began performing due diligence, during which they discovered that two employees were instrumental to the operations of the business. The seller allowed the buyer to talk to the employees (against our advice) to ensure they would be retained, but the employees demanded an increase in salary far beyond what the buyer considered reasonable. The buyer walked.
    • Solution: Implement a retention strategy with key employees that includes a retention bonus, non-disclosure agreement, non-solicitation agreement, and non-compete agreement (if legal in your jurisdiction).
  • Lack of Employee Cooperation: An offer was received on a commercial landscaping business. Once the management team learned of this through indirect sources, they felt slighted and were determined to derail the deal. Despite the seller’s attempts to pacify the team, their resentment couldn’t be contained. When the buyer got wind of this lack of cooperation, they rescinded their offer.
    • Solution: Implement a retention strategy with key employees that includes a retention bonus, non-disclosure agreement, non-solicitation agreement, and non-compete agreement (if legal in your jurisdiction). Communicate with employees about your plans to sell the company well before you begin the process to ensure their cooperation.

Build a management team that’s strong enough to run the business without you, and make sure your business can be sold to a buyer outside of the local area.

Financial Attributes

Fortunately, most financial challenges can also be addressed before the sale by obtaining a quality of earnings analysis (QoE) and selling when the business is doing well.

Following are a few cases we encountered in which a deal died due to financial reasons:

  • High Growth: One business was experiencing a growth rate of 30% per year. Buyers were only willing to buy the business based on historical earnings, but the owner wanted to be paid based on the next 12 months’ projected earnings and wasn’t willing to consider an earnout.
    • Solution: Retain an experienced M&A intermediary to prepare a valuation of your business before you begin to sell. Develop realistic expectations based on the valuation and be willing to consider alternative deal structures, such as an earnout, if you’d like to target a purchase price on the high end of the value range.

Little can be done to sell a low-revenue or low-profit business. Your highest probability of selling one is through your personal relationships.

  • Decline in Revenue: Revenue declined by 10% between the time one business was put on the market and when due diligence was complete, but the owner was unwilling to lower their value expectations. The decline instilled fear in the buyer, yet the seller was unwilling to pacify them with the offer of a price reduction, which would have been fair in this case. As a result, the buyer walked.
    • Solution: Educate yourself on the factors that can impact the value of your business so you’re prepared in the event your EBITDA declines. Do everything possible to maintain or grow EBITDA the moment you decide to sell your business.
  • Low Revenue: Our marketing activities generated few results because this business had little revenue and cash flow. While the business was attractive and the products proprietary and patented, no buyer was willing to take a deeper dive. “Why does the business generate so little revenue,” they wondered, “if the products are so great?” The truth was that the owner couldn’t raise venture capital and had nothing to invest in marketing. Buyers seldom waited to hear this story and dismissed the business as soon as they learned of its revenue.
    • Solution: Little can be done to sell a low-revenue or low-profit business. If you own such a business, your highest probability of selling it is through your personal relationships or to someone who is already aware of your potential and buys into your vision.
  • 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 business couldn’t feasibly be sold to a competitor.
    • Solution: Little can be done to sell a low-revenue or low-profit business. As above, your safest option is to approach personal contact and those already aware of your company and its promising outlook.
  • Inaccurate Financials: A buyer made an offer on this business but discovered multiple inaccuracies in the financial statements during due diligence. They attempted to clarify these with the seller’s accountant, but the accountant was unable to sufficiently assuage their fears. The buyer walked.
  • Tax Returns Not Reconciled: An offer was accepted from a roofing company, and due diligence uncovered disparities that couldn’t be reconciled between the financial statements and federal income tax returns. The buyer downgraded their offer, which the seller was unwilling to accept. Upon the advice of their CPA, the buyer walked.
    • Solution: Retain a firm to prepare a quality of earnings analysis before you put your business on the market.

Seller Issues

Many issues related to the seller can also be resolved in advance, primarily through adequately preparing the business for sale or through educating oneself about the process beforehand.

Following are a few cases in which a deal died due to issues related to the seller:

  • 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 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 included inaccurate financials, a lack of proper insurance (cash flow was overstated due to the artificially low insurance expense), no tax planning (the business was a C Corporation and subject to double taxation in an asset purchase), lack of approval from a minority partner, and no agreements or retention plan with key employees.
    • Solution: Retain an M&A firm to assess your business before you go to market. Their assessment should include a thorough analysis of your business and a list of steps you should take to prepare your business before you begin to sell it.
  • Valuation Expectations: We performed a valuation on a technology company and valued them at approximately $7.5 million. The owner believed his company was worth $12-14 million. We attempted to market the business on their terms but generated little response. The revenue in the business then declined, which reversed their positive trend. We downgraded our valuation to $6 million but the owner dropped his only to $11 million. We saw little buyer activity.
    • Solution: Retain an M&A firm to prepare a valuation of your business several years in advance of the sale so you know exactly what numbers you need to hit to achieve your financial goals.

Management Issues

Management issues can frequently be resolved before the sale, although the majority take a significant amount of time and should be addressed well beforehand.

Following are cases in which a deal died due to management problems:

  • Owner Dependency: We represented a professional services firm and received significant buyer interest in a short 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 his, though he wouldn’t allow a buyer to use it going forward. As a result, no buyer was willing to make an offer despite the high cash flow and attractive asking price.
    • Solution: Build a management team that can run the business without you. If you can’t build a management team, then delegate as many of the key tasks as you can to your employees. 
  • Family Involvement: Multiple family members were involved in a business we represented in the services sector. Our marketing efforts generated several interested buyers, but when they dug deeper into the mechanics of the business, they discovered family members were instrumental in the operations. The family’s compensation wasn’t at market rates, and no members were willing to stay past the initial transition. As a result, buyers considered it too risky to replace the owner and spouse, as well as other families involved in the business.
    • Solution: Replace any family members who are currently working in the business but who will not stay after the sale. If any family members are willing to stay, make sure their salaries are at current market rates.

People Problems

People problems can often be anticipated and resolved, although the degree to which this is possible is unpredictable.

Here are some case studies in which our deal died due to unanticipated people problems:

  • Personality Conflicts: An offer was made and accepted. Due diligence began smoothly, but personality conflicts between buyer and seller developed and gradually grew out of control. The parties became deadlocked on several issues, and both refused to budge. These mounted to the point where the deal finally died.
    • Solution: Spend personal time with the buyer before accepting a letter of intent. Ensure the buyer is someone you can get along with before committing to the LOI. This is especially important if the transition period will be long.

The buyer’s personality is difficult to anticipate. Spend time with them, and learn what they’re made of with small challenges before you accept an LOI.

  • Minority Partners: We put a business on the market, successfully generated several buyers, accepted an offer, and began due diligence. 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 this demand and the buyer subsequently walked.
    • Solution: Ensure you have similar expectations and alignment with all minority partners before you begin the sales process. Negotiate a buy-sell agreement with any minority partners that includes tag-along and drag-along provisions.

Third-Party Issues

Challenges related to third parties can be difficult to predict, but their likelihood is high. 

Here are some cases in which a deal died due to unanticipated issues with third parties:

  • Landlord: This 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.
    • Solution: Negotiate an assignable option to renew with the landlord before you begin the sales process.
  • Franchisor: We received an offer on a multi-unit 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, they would only receive two. They walked, and we don’t blame them. Note: this is a common issue with franchisors. Many grant territory sizes that are too large when they initially start, and try to claw back territories decades later when the franchise becomes successful and they begin running low on new geographic regions.
    • Solution: Contact any third parties, such as franchisors, well in advance of the sale to make sure no surprises will kill your deal. Make sure you’re both on the same page regarding the transfer process and whether any terms of your agreement will change. Note that many agreements contain a change of control provision, which requires the other party’s consent in the event of a change of control. The result is that the other party has full veto power over the transaction and can use this leverage to change the terms of the agreement.

Landlords can kill deals if the location of the business is critical. Many are opportunistic and take advantage of the situation.

  • Accountant: We received an offer for a service-based firm in the Midwest. The seller accepted the offer and the buyer began due diligence. Here 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 consistently unresponsive. As a result of the delays, the buyer walked.
    • Solution: Retain a firm to prepare a quality of earnings analysis before you go to market. Let your CPA or accountant know well in advance of your plans and obtain their commitment to the process before you begin the sale.

Financing Issues

While financing issues can’t always be prevented, they can be mitigated by educating yourself about the process upfront and setting realistic expectations with buyers early on.

Following are case studies we encountered in which financing killed the deal:

  • Bank Financing: We received an offer on a specialty manufacturing business. Due diligence was successful, but the buyer was unable to obtain financing and didn’t have an adequate down payment for the seller to consider financing the sale.
    • Solution: The issue of financing can be a wild card you can’t control. If the buyer can’t obtain financing, there’s often little you can do than finance the sale yourself. To minimize risk, your letter of intent should include a clause that requires the buyer to obtain a commitment letter from their financing source within a specified period.
  • Seller Financing: 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, and the offer wasn’t accepted.
    • Solution: Educate yourself on the most likely deal structures buyers will propose. Determine in advance which structures you’re open to so you can set expectations with buyers as early as possible. If you’re not open to an earnout, for example, you should let the buyer know this upfront.

Summary of Deal-Killers and Action Steps

Following is a summary of some of the deals that died and what could have been done to prevent it:

The Economy
RecessionAlways be prepared to sell.
Industry Attributes
Limited Buyer PoolDevelop a plan for management to obtain the license and a retention plan with your team to ensure they stay throughout the transition.
Business Easy to ReplicateDevelop elements of your business that are difficult to replicate.
Industry ChangesDevelop value in your business that’s desired by buyers and difficult to replicate.
Risky IndustryStay in tune with industry news and always be ready to sell in the event you feel you can no longer remain competitive.
Competitive IndustryDevelop a differentiated business model that’s difficult for others to replicate. 
Unattractive IndustryDevelop a strong team and processes that insulate the owner from emergencies.
Unattractive FranchiseAttempt to work out a solution with the franchisor.
Business Attributes
Limited Management TeamBuild a strong management team that enables the buyer to run the business remotely.
High Customer ConcentrationAddress customer concentration issues several years in advance of the sale.
Key Employee DependencyImplement a retention strategy with key employees several years in advance of the sale.
Lack of Employee CooperationImplement a retention strategy with key employees and inform them about the sale in advance.
Financial Attributes
High GrowthObtain a valuation, develop realistic expectations and determine what deal structures you’re willing to consider.
Decline in RevenueEducate yourself on the factors that can impact the value of your business and do everything possible to maintain or grow EBITDA during the process.
Low Revenue/ProfitabilityBuild a network of potential buyers who may be interested in buying your business in the near future.
Inaccurate Financials/Tax Returns Retain a firm to prepare a quality of earnings analysis.
Seller Issues
Lack of PreparationRetain an M&A firm to prepare an assessment of your business and a list of action steps to prepare it for sale.
Valuation ExpectationsRetain an M&A firm to prepare a valuation so you know what number you need to hit to obtain your objectives.
Management Issues
Owner DependencyBuild a strong management team.
Family InvolvementReplace any family members who won’t stay and ensure salaries are at current market rates for those who will.
People Problems
Personality ConflictsSpend time with the buyer before accepting an LOI. 
Minority PartnersEnsure alignment with all minority partners and negotiate a buy-sell agreement if possible.
Third-Party Issues
LandlordNegotiate an assignable lease option in advance.
FranchisorContact third parties in advance to eliminate surprises. 
AccountantRetain a firm to perform a quality of earnings analysis.
Financing Issues
Bank FinancingInclude a clause in the LOI requiring a commitment letter from the lender in a specified period.
Owner FinancingEducate yourself on likely deal structures and determine in advance what you’re willing to accept so you can set realistic expectations with buyers.

The Death of a Deal: Multiple Factors

It’s important to note that many of the factors above can also occur simultaneously. For example:

  • The buyer may not be able to obtain bank financing.
  • The buyer may discover that the financial statements are inaccurate.
  • The buyer may become concerned about high customer concentration, key employee dependency, or a lack of cooperation from key employees.
  • The revenue of the business may decline after an offer is accepted.
  • Third parties may cause delays.
  • 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 present for the buyer, the more nervous they’ll become and the more likely they’ll walk away from the deal. 

How to Prevent Deal-Killers

The first step to maximizing the value of your business is to prepare for the sale as early as possible.

Hire a third-party expert to perform an assessment of your business and help you identify and mitigate any risk factors well before you put your business on the market. For example, during our assessment of a business, we do the following:

  • Evaluate the salability of a business
  • Identify risk factors
  • Identify potential deal killers
  • Create a plan to help the owner maximize the value of their business
  • Explore multiple exit options for a business owner
  • Review a business’s financial statements 
  • Establish a value range for the business from low to high.

Conclusion

As you can see from the cases above, there are a wide variety of factors that can prevent a business from selling. While some are inescapable, many can be addressed with proper preparation. 

Even if a problem can’t be completely eliminated, it may still be possible to mitigate its effects so that you can bring reassurance to your buyer. 

While the number of potential issues may seem overwhelming, an experienced M&A operator will have developed the ability to quickly identify patterns and can help mitigate any likely deal killers. This will dramatically improve the value of your business and help ensure a successful sale.