Why Won’t My Business Sell?
The Exit Planning Institute (EPI) estimates that over $10T in business value will be prepared to transition in the next decade. However, the EPI also predicts only 20% to 30% of those businesses will actually be able to sell. With such abysmal expectations, many sellers may look at the future and think the potential success of their long-expected exit is about as likely as the startup phase of their business–which could be a bit depressing. The reasons why a particular business will not sell can be as vast as the businesses themselves. Understanding some of the major flaws in the business, how the deal is marketed and the true market value of the company can help to prevent an eventual stale deal but will also ensure the eventual success of an exit. And, given that most private company owners have 80%+ of their personal net worth tied in the value of a single private company, ensuring exit success will be top priority for thousands of business owners.
Flaws in the Business
In many cases, a business will not sell because there are inherent flaws in the business itself. Such flaws can be found–but are not limited to–flaws in the marketing, operations and finance/accounting aspects of the company. In some cases, buyers may be put-out by things like customer or supplier concentration, lack of penetration in the given market and even the industry itself. For instance, industries like retail, project-based construction, commodities businesses (e.g. oil & gas) and ancillary services to these businesses can make it difficult for many investors to get excited as the potential industry or macro-market risk may be too great to get involved.
Investment bankers tout the ability to obtain premiums on companies they take to market, but such a premium presupposes the ability to effectively build a market for the private company. In many cases, the risks of certain industries quickly precludes the addition of many types of bidders to the buyer’s table, including many conservative and disciplined private equity groups who rarely invest out of their lane.
It is certainly true that flaws in the business can eliminate some buyers. But savvy buyers will often see most flaws as opportunity for improvement on either the revenue or cost-savings side of the equation, making the buy (at the right price) an attractive offer. In most cases, flaws in the business equate to either industry-specific flaws or the lack of significant profitability (or potentially significant profitability based on the adjustment and tweak assumptions) based on the business as a going concern. To clarify, many buyers have disciplined thresholds on the level of profitability in which they will actively pursue.
“Not above $5M EBITDA? Then we are not interested,” they might say.
Many buyers might be formulaic on their approach, which could eliminate many sellers from larger pools of capital, particularly those in the lower end of the middle market.
Flaws in deal marketing
The deal marketing and business sale process may be marred by some key flaws which could include, but are certainly not limited to:
- The quality of the pitchbook. A company’s pitchbook or CIM (Confidential Information Memorandum), as it is often called, includes all the relevant information on the business. How well the pitchbook is done, can remain a critical component of getting a deal done. A poorly executed pitchbook, can prove an immediate turn-off to some of the most polished buyers. While some might argue a good business can sell itself, the strategy of painting the house before selling it remains true. While some private equity groups may enjoy a clean-up project, the most successful investors want to acquire something turnkey and not a “project”. Whether completed in a poor or quality manor, the pitchbook can be the ultimate reflection of how the company treats matters of importance. A poor quality pitchbook reflects poorly on the care the owners and management may have had on the business itself–whether true or not.
- The quality of the marketing list. Who ultimately sees the pitchbook is reflected on the quality of the outbound marketing list for potential buyers and how this list is treated. In the case of a broad auction for the business, the list should contain all relevant strategic and financial buyers for the business. In addition, sometimes sellers–in their fear of confidentiality among some buyers–may wish to eliminate some buyers from the strategic list. While eliminating them from the list enhances confidentiality and reduces risk, not having some of the most strategic buyers decreases the chances of a done deal at a premium price. Yes, competitors can be problematic in the sale of a business, but that double-edged sword should be handled with care with the help of an experienced professional.
- The hustle of the outreach. How well was the list penetrated? Did the intermediary simply send an email blast out to all the general email inboxes of the potential buyers or did each executive or business development manager receive an individual phone call introducing them to the deal? The latter of the two examples is the most difficult and time consuming, especially given the fact that many deal marketing lists including thousands of potential buyers. Even the Tier 1 call list (which is the most likely to get a call) still holds perhaps 500 buyers. Were they called directly? Did the seller’s intermediary ensure a “fish or cut bait” answer was received from each player? Were there follow-ups to all on the list who had not yet said, no?
Marketing a business can be difficult. As far as timing is concerned, the sell-side process on even the best of deals can take a year or more. The marketing aspect of the deal is a critical piece to the overall successful sale of a private, illiquid business.
Not all marketing processes are created equal and not all businesses M&A processes should be marketed the same way. There are certainly square pegs for square holes when it comes to deal marketing. It is an important side note that if one method is not working (and the success or failure of one approach over another can be evident very quickly), it would be wise advice to remain flexible as to how your investment banker markets your deal. Pivoting a deal process and marketing approach may be the best way to land on the right side of the bell curve in selling your business.
Improper deal structure
Similar to the messy pitchbook scenario laid out before, the capital and ownership structure of some deals can make them appear toxic to would-be buyers. A crazy person in the cap-table, unresolved founder or family issues, too many shareholders with too much voting power, outside contracts that can influence the sale (e.g. First Right of Refusal on a purchase or other binding contracts) may influence the buyer’s willingness to directly jump-in. Luckily, most sell-side deals that hit the market have resolved most of their internal cap-table issues before doing so. If they haven’t, buyers may find deal-breakers in due diligence. Knowing where to look for and fix such prior to marketing a deal is a key component to its successful and eventual close.
Distorted business valuation expectations
While we have spoken at length of the problem of sellers’ unrealistic valuation expectations in the sale of their businesses, it cannot be stated enough: the number one reason successful middle and lower middle-market businesses do not sell is because the seller dogmatically holds to the idea that his/her business is worth more than the market will bear. If all the other components listed above have been flawlessly completed, the likelihood of one ore more offers for the business is relatively high. If an offer comes in and the seller does not close, there is likely some type of disconnect between what buyers are willing to pay and what the seller expects. If the gap cannot be closed, then deals remain undone.
In addition, seller and buyer egos can also play a huge role in this and the other bullet points listed above. Because ego is generally ethereal in nature, the seller/buyer psychology discussion is likely worth another 10 posts and one in which we will not cover here.
The EPI statistics are certainly bearish on the likelihood of selling a business. Fortunately for business sellers, the time has never been better than right now. Buyers are flush with cash and actively looking for good deals. If your businesses has been on the market for sometime and you have not yet been able to sell, perhaps it is time to rethink your sell-side strategy. There is an active buyer market for profitable and successful companies. Sellers simply need to know where to look and connect.
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