Five factors drive 75% failure rate

June 1, 2015

By Scott Bushkie, CBI, M&AMI
Cornerstone Business Services, Inc.

Tom West is considered by many to be the founder of modern day business brokerage. A few years ago, he calculated what percent of businesses on the market actually sell. For most small businesses, those with sales of $10 million or less, he figured fewer than 25 percent actually transition successfully to a new owner.

That kind of 75 percent failure rate is shocking, yet in my experience, it’s an all too accurate representation of our industry. There are a lot of factors driving down success rates, but here are the five I see most often:

For Sale By Owner

You don’t know what you don’t know. Selling your business is not the time to learn on the job. There are too many opportunities to make mistakes and not only hurt the value of your business but substantially lessen the chances to sell your business.

Priced Too High

I had a business owner tell me he figured his company was worth about $100,000 for every year he worked, or $2.5 million. In reality, it was probably worth well under $1 million. Price the business too high and you’ll burn through a lot of qualified buyers who won’t even bother taking a look. Eventually your business will sit on the market so long it’ll get shopworn and people will just assume there’s something wrong with it.

Inflexible Deal Structure

Many lower middle market businesses do not get paid all cash at close. Financing the deal usually includes some kind of seller support, like seller financing or an earn out. If you’re rigid about your terms and the buyer can’t get financing, the deal isn’t going to get done.

Seller Burn Out

The number one reason people sell is that they’re burned out. Unfortunately, that means they’re already out of energy by the time they put their business on the market. That means instead of one big push to the end, they’ve already mentally checked out. Revenues inevitably decline and many of these sellers end up closing their doors before they can find a buyer.

Wrong Advisors

Too often business owners want their current accountant and attorney to represent them in a business sale. But if these advisors are inexperienced when it comes to M&A, they tend to get ultraconservative. These advisors don’t want to risk making a mistake that could affect their client and their own errors and omissions insurance. I’ve seen buyers walk from a deal because the seller’s attorney was being unreasonable. Your chances of success increase considerably when you get the right core of specialists, at a minimum you want an accountant who understands M&A tax strategies to help minimize taxes, an M&A advisor to sell the business and maximize the value and an M&A attorney to protect you while still working towards getting the deal done.

Honestly, there are probably a thousand reasons why deals don’t get done, but I’d be willing to bet that these five core issues are at the heart of at least 80% of all deal failures. Scott Bushkie is Principal of Cornerstone Business Services, a low-to-middle-market M&A firm. Reach him at 920-436-9890 or sbushkie@cornerstone-business.com. Copyright 2012.