The #1 Sure Sign That A Business Owner Is NOT Ready To Sell.

The Two Critical Questions That Determine If A Business Is Saleable.

As a Mergers and Acquisitions firm, Calder Associates prides ourselves on selling businesses not just listing them. This means that we must have a high degree of confidence that we will be successful in consummating a transaction before we agree to represent a business owner. As part of our process, we complete in-depth pre-due diligence before we select the businesses that we want to work with. Once we have determined that a business is saleable, we then turn to two key questions that only the owner can answer. They are:

1. Is the owner realistic about selling price?
2. Is the owner ready to sell?

If the answer to these two questions is "YES", and we believe there is a market for the business, we will sign an agreement to work together towards a sale. Unfortunately, during the process of selling a business, anything that negatively impacts the desirability and value of the business can impact the answer to these questions. Some things that will have a negative impact on value include a decrease in sales; the loss of a key employee, the loss of a major customer, sickness of the owner or key personnel; decrease in sales and marketing efforts or an uncertainty in the economy. Let me give you an example of a situation that I am facing to illustrate what can happen when business performance declines.

One Sure Sign That A Business Owner Is Not Ready To Sell

I am working with an 80-year-old business owner whose business performance has decreased by 25% since we agreed to work together. When he received offers below his expectations but based on the lower performance, the owner rejected them as too low. He argued that a new buyer can benefit from the platform that he has built over the 40 years that he has been in business. In other words, he wants to be paid for effort and not performance. This is the #1 sure sign that a business owner is really not ready to sell.

A business is valued at a multiple of EBITDA, not the number of years it has been in business. The stronger the financial performance the higher the valuation. Yes, there are other factors that will impact the value but a buyer will simply not pay a higher price just because the business has been in business for 40 years....or because the owner needs the valuation to retire.

I have explained to him that to get the deal that he wants, he would have to increase his sales by 25% and his EBITDA by 50%. Moreover, he would have to demonstrate performance at that level for two to three years before he could get what he wants. I have also explained that other businesses in his industry are thriving. It is not the economy causing a decrease; it is the lack of his investments in sales, marketing, and technology that are creating the decline. His response is that he could liquidate for more than the offer. Liquidation will lead to many unintended consequences.

Unintended Consequences

His equipment is old and he is overestimating its value by at least 40%. However, even if he could liquidate at more than the offer, liquidation has its costs as does closing down a business. And in liquidating, his loyal staff who has worked for him for years would be unemployed. There is also the property that he owns that would have to be sold. The property alone could take months even years to sell. In other words, liquidation has unintended consequences that can impact what he believes is a viable exit alternative to selling.

He has also talked about continuing to run the business until he gets the offer that he originally wanted. To do this he will have to work like a young, motivated owner, put in the hours with no certainty that he will be able to sell it in a year or even five years. He has to invest in people, technology, SEO, and PPC. In addition at 80, he has already admitted to winding down and not wanting to invest in the business. So, he has to prepare to liquidate or his heirs have to be prepared to close the business down when he can no longer work. 

The Choice Between The Known and Unknown

Alternatively, he can take a deal that is 20% less than what he wanted but is a good deal based on current performance. If he wants to retire, provide employment for his loyal employees, collect considerable rent on his property, continue to serve a loyal customer base and see the business grow, this deal is a realistic alternative. He faces a critical choice.

I have a critical choice to make as well. The answers to the qualifying questions that once drove my decision to take on this project have changed.

The business owner’s expectation of selling price is simply unrealistic. Today, he would not meet our client selection criteria. In spite of all the effort that the Calder Associates team have invested in this project, it appears as though the probability that a deal can be consummated is very low. So terminating our contract is a consideration.

The business has been on the market for over a year already, there have been three offers. There is an offer on the table that is great offer given the decline of the business. The business owner recently rejected the offer, and the buyer has countered but the business owner has not accepted the counter.

M&A Advisors Are Not Magicians

I often say that I am an M&A intermediary...not a magician. I am still trying to pull all the tricks out of my hat that I know to get the buyer and seller to agree to terms that they both can agree to, but I am skeptical that I am working with a business owner that is realistic and wants to sell. When I took on this project, the value did align with the client's expectations, but now it does not. I have seen this situation in the past. In ninety-nine percent of these past cases, the business owner regretted passing on a deal that was good but below expectations, because they never received another comparable offer.

As most reading this know, accepting an offer is just the beginning of the process. The next step (should the business owner accept the offer) is due diligence, legal documentation, financing, and hopefully closing. It is difficult enough to get through this process with a motivated buyer and seller. Convincing a seller to accept a deal that they do not want, even if they are unrealistic, will just end up in a deal that cannot get to closing. 

It Is What It Is.

I have done my best to educate the seller on all the options and the risks. In the end, the decision is his whether to sell to this buyer. If he accepts it, I will do my best to help him get to the closing table. If he does not move forward with this deal, he is no longer a qualified seller, and I will have to give him a termination notice as our company cannot invest resources in representing a seller who is unrealistic about selling price.

The Valuation Delusion Syndrome-Revisited

This article is not the first time that I have written about the gap between sellers expectation of value and reality- I call it the Valuation Delusion Syndrome. It is truly an epidemic among business owners! Over the course of a month, we reject 9 out of 10 sellers who want to sell their business but have an unrealistic expectation of value.

Business owners must think about their succession plan and exit strategy well before they turn 70-let alone 80. I know, we all think we will live forever, but business owners have to face the reality that exiting their business is inevitable. Planning for a business exit not only helps build a profitable business but also helps to build a business that can be sold someday for what it is worth. What a business is worth is not based on what an owner needs to retire, or the years of effort that a business owner has put into the business, it is based on performance. For most business owners, their business is their single most valuable asset. For this reason, alone, it is critical that when the time comes for succession, a business owner has a realistic view of value. 

Knowing What Your Business Is Worth Is Worth Knowing!

Of course, most business owners, don’t know what their business is worth and don’t understand the process of selling a business. I would be happy to speak to business owners one on one or in a group (in person or online) about this topic. Click here to schedule a phone call. Click here to inquire about speaking to your business group.

Remember, every owner, at every stage of business, must know what their business is worth, have a strategy to build value, and have an exit strategy. Do you?