What Qualities Make a Business More Difficult to Sell?

 What Qualities Make a Business More Difficult to Sell?

As you might imagine, buyers turn over every stone before purchasing a company. For this reason, it is essential to understand the qualities that make a business easier or more difficult to sell. In this review, we focus on the most common financial and operational issues that may make a business harder to sell for optimal value. We also discuss what owners can do to make their company more attractive and easier to sell

Financial Issues That Make a Business Difficult to Sell

Of course, you need strong financials to sell your company; most businesses without profit are hard (if not impossible) to sell unless they have substantial value in their assets and/or proprietary and valuable patents or licenses. As you might imagine, the financial performance of your company is the primary concern for potential buyers. So, what issues might affect your company’s ability to sell? Here are several possible financial qualities that make a business harder to sell for optimal value: 

 

  • Your financial records are lacking
  • Your company’s financial information is inaccurate
  • Your company has low revenue or is not profitable
  • Your company’s revenue has declinedAdobeStock 375026606
  • Your company does not have recurring revenue

Your Financial Records Are Lacking

You will need to prove your company’s profitability with verifiable financial information; buyers will not simply take your word for it. If you are unable to provide reliable documents such as federal tax returns (3+ years), profit and loss statements, etc., then you may find it difficult to sell. Additionally, buyers may request (or require) a review engagement report. This is a third-party and objective review of your company’s accounting and bookkeeping. An engagement report (or an engagement review) is a great way to establish trust with the buyer. To go one step further, you may also benefit from a comprehensive audit report

Your Company’s Financial Information is Inaccurate

The buyer operates with a degree of trust and good faith that the financials you present during offers and negotiations are reliable and accurate. During due diligence, the buyer conducts a deeper dive into your financial performance and verifies the information you provided. If they find that your financials are not how you presented, then they may withdraw their offer, particularly if you (or your accountant) are unable to explain the discrepancies. At best, inaccuracies can lead to major setbacks. At worst, it can cause an inability to sell your company. 

Your Company Has Low Revenue or Is Not Profitable

As mentioned, companies without profit are incredibly hard to sell. Buyers do not tend to care how great your product or service sounds if you do not have substantial revenue and/or profits. The logic here is: “If the product/service is so great, then why does it not generate profit?” Of course, in many cases, there are valid and reasonable explanations for a lack of revenue or profit, and the seller must do a good job of explaining the reason the company is not profitable if they intend to sell for any meaningful value. 

Your Company’s Revenue Has Declined

You may find it difficult to sell for optimal value if your company has declining profits in recent years. This may be the case even if you are still profitable. When it comes to selling a business, buyers often have a “what have you done lately” mindset. A proven track record is valuable, but your profits over the past three years are most important. Therefore, if you have declining profits, then you will need to properly explain the reason for the decline to help ensure you sell without complication. For instance, a seller may explain that the decline in profits is due to a major reduction in ownership involvement as they near closer to retirement and not related to the company’s earnings potential and future outlook. 

Your Company Does Not Have Recurring Revenue

This could also be listed under the operational category as it relates to business operations and pricing models. A company that has predictable revenue is more valuable on the market. For example, an HVAC company that has ongoing maintenance contracts of high value is more valuable than an HVAC company that relies solely upon service calls. This is because the less recurring revenue, the more risk the buyer assumes. If they are not positive that the profit will cover next month’s expenses, then they are not likely to make an offer of fair value. 

Operational Issues That Make a Business Difficult to Sell

The ability to sell your company goes beyond your financial information and performance. Operational issues may also impact the difficulty of your sale. Notably, the most common operational issues that sellers must address or explain during a sale include: 

 

  • The buyer must possess a specialty license in a niche market
  • The company is largely dependent upon the owner
  • The customer concentration is too high
  • The company has a high employee turnover rate
  • You are forced to sell your company

The Buyer Must Possess a Specialty License in a Niche Market

Although this is uncontrollable and of no fault of the seller, the reality is the need for a particular business license greatly limits the number of potential buyers. This is especially the case if the license is specialized. For instance, a liquor license for restaurants is easier to attain than a physical therapy license. Of course, you can still sell for fair value if your business requires a license, but you may need a more refined and personalized marketing approach. If marketed properly, the high barrier to entry for the industry may work in your favor. 

The Company is Largely Dependent Upon The Owner

You may at first assume a high ownership involvement will show your commitment to the company and present your business in a positive light. However, the opposite is true in many cases. Buyers often prefer a company that can operate in an organized and profitable fashion with little involvement from ownership. To determine how dependent your business is upon your involvement, ask yourself this question: “How would my company perform if I were to turn off my phone and go on vacation for two weeks?” If the company would struggle, then it may be too dependent upon the owner. 

The Customer Concentration is Too High

Buyers ideally want a company that has a diverse set of customers across multiple customer segments. With that in mind, a company that has one client that makes up 50% or more of the company’s revenue is seen as riskier and less likely to sell for high value. On the other hand, a business whose top account only accounts for 20% of the company’s revenue and that has customers in a dozen different customer markets is likely to be far more valuable as it is seen as less risky with more growth potential. 

The Company Has a High Employee Turnover Rate

Some industries naturally have a higher employee turnover rate than others. For instance, the turnover rate for a construction company will be naturally higher than that of a law firm. Nevertheless, the more employees you have that have been with your company for an extended period of time and consequently understand the inner workings of your company, the more valuable it is. However, a high employee turnover rate may be a sign of an operational issue and/or a poor work culture in the eyes of buyers. 

You Are Forced to Sell Your Company

The reason you are selling matters. If you are simply of the age of retirement and are ready to start the next chapter of your life, then buyers will be more interested. However, if you feel forced to sell your company and have no choice, then buyers may be more skeptical and/or try to take advantage of your situation. For example, if there are internal disputes amongst the ownership group and/or shady business practices among one or more of your business partners, then this may make your company more difficult to sell. 

Final Thoughts

Keep in mind, there are many additional qualities that may make or break your business during a sale. Ultimately, you should review the specific details of your company with a professional business broker to determine how easy or difficult your company will be to sell. Of course, red flags do not mean you cannot sell, but you should properly do all you can to address them and prepare an explanation if there are any concerns that are unavoidable. With the right planning, you can help ensure a smooth and successful sales journey. 

 

Sigma Mergers & Acquisitions Dallas Business Brokers is a M&A firm in Dallas texas that focuses on Small and Mid-sized businesses with an enterprise value of 1 million to 100 million. Using the latest technology to protect confidentiality and increase buyer engagement by 200%.

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Scot Cockroft Business Broker
Hi, I’m Scot Cockroft.

When I founded Sigma Mergers and Acquisitions back in 2003, I had sold my business the year prior.

Now, that can sound good, but let me tell you, back in 2003, it was not easy to sell a business. Not that I’m saying in modern day times it’s easy to sell a business, but back then I interviewed broker after broker after broker, and no one was interested in actually seeing the value that my business brought to the table.

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Sigma is a the leading business broker in with Corporate offices in Dallas/Fort Worth with roots from 1984. Over 600 businesses sold in Dallas, Fort Worth, Texas, Oklahoma and across the South. Sigma provides full business brokerage services with NO upfront fees. We provide Market approach business valuations for business sales. Sigma is passionate about helping business owners achieve their goal of financial security. Contact us today for a free no obligation business valuation. We are here to help you achieve your goals.

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