3 Things That May Make Your Business Unsellable
Here is a little known but unfortunate fact about the small business marketplace: almost 90% of businesses out there are unsellable. This according to Scott Duke, the founder of OpnRoad, an M&A firm that specializes in attracting strategic buyers for businesses with between $2 million and $25 million in revenue.
In fact, Duke himself has had 11 businesses, several of which he was able to sell successfully, but not all. The reasons why are not always as straightforward as people may think. “I used to be a professional wakeboarder and we built the largest wakeboarding facility in North America,” Duke said during his presentation at this year’s #BossUp conference. “It was a great company, we had 25 staff…but it was unsellable.” There were many boxes that the business hadn’t checked — dozens upon dozens of boxes that Duke now spends his professional life helping sellers check in order to attract savvy buyers.
Duke presents businesses as an evolution. All companies start in stage one and almost 90% remain there. These are companies with less than $500,000 in revenue, and they are, in the vast majority of cases, unsellable. That’s because they are smaller which means they are inherently riskier, more susceptible to industry-related risks, and because there are more of them in the marketplace (so they aren’t a scarce resource). These businesses need to be built into the higher stages to make them attractive to strategic buyers.
Once they’ve arrived at those stages, Duke and his team have designed a rubric to assess sellability: six categories, with multiple variables each, that he walks through in detail in his presentation. In most cases, these variables exist on a spectrum driving up the price of the business or down, but in the extreme some of these could make the business “unsellable.” Here are just a few examples.
Poor Inventory Management
Messy financials are an exceedingly common reason why deals fall through. “Your financials need to be well set up, they just have to be,” Duke said. One of the indicators of a well-run balance sheet has to do with inventory management. In one case, Duke consulted a flooring company that had $200,000 in EBITDA but over $2 million in inventory, which is way too much. “That’s an unsellable company with the way it’s structured,” he said. Strategic buyers will know that.
An Expiring Lease
In a brick-and-mortar business, a buyer’s ability to secure financing is linked to the lease. “If your lease only has a year or two years left on it, there’s a high probability your company is unsellable,” Duke said. Banks only lend up to the term of the lease, and if the loan is only two years, that’s going to make the monthly payments far too expensive for most buyers. A five-year lease, for example, will give the buyer much greater breathing room and make your company more appealing.
You’re Inflexible on Your Terms
In Duke’s experience, some sellers simply aren’t ready to sell. This, among other things can lead to intransigence on their deal terms, which most buyers won’t accommodate. “If you’re really fixed and really rigid about the terms of how you want to sell your business — ‘I’ll only accept cash offers and it has to be full offer price’ —sorry you may not sell your business,” Duke said. When there’s an offer, there’s usually a structure with it; there may be a vendor note, earn outs, stock, etc. Being able to negotiate those can help you get more for your business.
Watch Duke’s full presentation here.
Opinions expressed here by contributors are their own.
BuyAndSellABusiness.com launched a private Slack community designed to help people connect, share insight and ask questions about buying, selling and growing businesses or franchises. Apply to join here.
Remember, if you are interested in receiving the latest business news, insights and opportunities from BuyAndSellABusiness.com, you can subscribe to our newsletter here. Also, if you are not a BuyAndSellABusiness.com user yet, what are you waiting for? Click here!
