Published on Wednesday, May 6, 2015

7 Mistakes to Avoid When Selling a Privately Held Business

Top Reasons Why Some Businesses Don't Sell

The list below contains some of the top and main reasons why some businesses don't sell in the current marketplace:
1. The Business is Overpriced

When it comes to selling a business, this is the source of the greatest heartburn for both the business seller and the buyer. In fact, industry statistics indicate that the number one reason that most small businesses fail to sell is because there is a perception that the business is overpriced. The idea that one can start with a very high price and then negotiate downward must be avoided at all costs. The main reason for this is that there are any number of similar businesses available in the marketplace at the same time. Also the presence and desirability of franchise operations increase the number of viable alternatives.

Most business buyers scan listings looking at basic numbers like price versus sales revenues, or price in comparison to profits or cash flow. These prospective buyers usually perform a quick review of these factors between and among similar businesses - in terms of size and type of business. While the business owner may consider his or her business as special and deserving of a much higher valuation, that enthusiasm is generally dampened by the realities of the market. That is, when the price is much higher than comparable alternatives, the result it that nobody even takes the time to look closer. These would be buyers conclude that the seller has unrealistic expectations and is probably not worth the trouble. 

Therefore, it is extremely important for business owners/sellers to establish a realistic and credible asking price for their business ... one that can be supported on a number of levels, including but not limited to the company's operating and financial history, industry trends, and market comparisons.

 

2. Seller is Not Flexible or Will Not Negotiate

In most business sales transactions there are typically a number of issues and terms on which Buyer and Seller cannot completely agree. This to be expected. However, there are certain issues and terms where the Seller will need to show some flexibility. One such item is in the area of Seller carry back financing. While most residential home sales and other big-ticket items are sold with all cash due at closing, small businesses often have some sort of of "seller carry" financing tied to the transaction. The reasons for this are both various and valid. Perhaps the Buyer is holding back a portion of cash for working capital purposes ... to be used to kick-start her recently acquired enterprise. Or maybe the lender involved can only stretch to a certain percentage of the purchase price, leaving a gap between the Buyer's down payment funds and the total needed to close the deal. In that case, Seller carry back financing might be just the thing to bridge that margin. Finally, it may be the case where the Buyer prefers to keep the Seller involved with the business, at least in the early going and feels that this type of financing provides a certain level of comfort. Such a gesture on the Seller's part could result in giving the Buyer enough confidence to move forward with the deal.   

Litigation Experience

In this section, the concern is whether the franchisor or any of its executive officers have been convicted of felonies involving fraud, violations of franchise law, or unfair or deceptive practices law, or are subject to any state or federal injunctions involving similar misconduct. It also says whether the franchisor or any of its executives have been held liable for—or settled civil actions involving—the franchise relationship. A number of claims against the franchisor may indicate that it has not performed according to its agreements, or, at the very least, that franchisees have been dissatisfied with its performance.

The litigation section should also indicate whether the franchisor has sued any of its franchisees during the last year, a disclosure that may indicate common types of problems in the franchise system. For example, a franchisor may sue franchisees for failing to pay royalties, which could indicate that franchisees are unsuccessful, and therefore, unable or unwilling to make their royalty payments.

Bankruptcy

This section discloses whether the franchisor or any of its executives have been involved in a recent bankruptcy. This is important information that can help assess the franchisor’s financial stability and whether the company is capable of delivering the support services it promises.

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Author: Lewis Martin

Categories: Business Brokerage

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