National statistics for the United States provided by resources ranging from the IBBA to BizBuySell.com indicate that annually 10 – 20% of the privately held companies and family owned businesses advertised for sale are sold. These businesses are advertised and represented for sale by owners, real estate brokers, consultants, business brokerage franchises, independent business brokerage firms, accountants, attorneys, professional mergers & acquisitions intermediary firms, private equity companies, and investment banks. These are disheartening statistics for a business owner wishing to retire in 2019 or 2020. The numbers convey that an entrepreneur’s life work may not have more than a liquidation value in the marketplace and that valued employees, customers, and vendors may be forced to migrate to new businesses due to a valued member of the business community closing their doors.
IBA, a 45 year old business brokerage company that has successfully sold over 4000 privately held companies and family owned businesses in Washington, Oregon, and Alaska, historically has significantly outperformed these statistics selling 75 – 85% of our representation projects in three to twelve months from the time we first contractually engaged with a client. This consistent performance for approaching five decades is based on the market leading level of knowledge, experience, and professional skill set found in our deep and talented team of business brokers. It is also due to our business model being in alignment with the goals & desires of our clients with 100% of our fees being paid upon successful completion of a business sale project. Simply said, IBA does not take projects it does not believe it will complete in a timely manner and only receives payment from happy customers.
This legacy of successfully completed transactions has allowed us to identify the four reasons why businesses do not sell.
The Business – Christmas tree lots are presently in operation throughout the Pacific Northwest. Business will be robust between now and the weekend of December 21 & 22. No customers will exist for this business model after Christmas until November 2020. The product sold at Christmas tree lots is pine trees. The product sold at a business brokerage firm like IBA is privately held companies and family owned businesses. In many situations the reason a business does not sell is because of the business. The reasons a business is not attractive to buyers looking in the market include that it is a failing business model. If a business is not profitable or generating a reasonable return on investment for ownership for their commitment of time, energy, and resources the likelihood of the business being attractive to a successor owner is greatly diminished. Some business models are destined to fail. Common causes of business failure are an overestimation of market demand for a product or service and high fixed overhead costs. The market for “fixer upper” businesses is very small. Entrepreneurs looking for an “angel” to save the day by buying their failing business are traditionally unsuccessful. IBA does not represent businesses for sale with failing business models.
A second reason a business may be difficult to sell is its location. Most parties wishing to buy a business wish to be directly engaged in the executive management of the company. Most buyers do not wish to uproot their families and life to buy a business. A strong preference exists with parties acquiring businesses to buy a company that is commuting distance from their homes and that does not require a spouse to change jobs and/or children to change schools. There is little that can be done to convince a business buyer to move if home relocation is not desired. Conversely, many times people do desire to relocate and a business acquisition can be a great vehicle to achieve that goal and simultaneous create an occupational and/or investment income stream. One of IBA’s current clients, relocated from Washington DC to Seattle to buy an IBA represented company. That individual is now ready to retire and has returned the business to the market with IBA to find a successor owner. Business owners in the Pacific Northwest are blessed that many people want to relocate to this region of the United States. IBA has successfully sold a significant number of businesses to individuals in its 45 year history who have relocated to Washington, Oregon, & Alaska from domestic and international locations outside of the Pacific Northwest.
A third reason a business may be difficult to sell is that it does not have a promising future. Valuation of a business relies heavily on the past performance of the company, however motivation to purchase a business is derived from the company’s potential in the future. The future prospects of a business can be detrimentally impacted by factors including new competition entering the marketplace, a change in demand in the marketplace for a product or service, the loss of a significant customer, and/or increased occupancy costs or the need to relocate the business. It is recommended when acquiring a business that a buyer investigate the future potential of the company with the same scrutiny that they evaluate the past. As the famous investment caveat states, “Past performance is not indicative of future results”. This is true whether you are buying a publicly traded or privately held company.
The Seller – No transaction is possible, if the owner of the business does not want to sell. A successfully completed transaction requires a business owner to agree to exchange control of the company for acceptable consideration. This agreement requires the business owner to be realistic on the price & terms of the negotiated sale. Many business owners have killed potential deals or failed to receive offers by seeking a value for the business out of alignment with market conditions. It is difficult to properly assess the market value of a privately held company or family business without significant accounting, finance, and investment knowledge combined with detailed information on market conditions in the relevant industry and geographic area. The most relevant knowledge related to the market conditions associated with the sale of a business are traditionally possessed by intermediaries actively facilitating transactions involving similar companies in the marketplace served by the business. Firms like IBA that possess this information are a common resource for information by business appraisers and CPA’s seeking to value client companies for estate planning purposes or internal sales.
A proposed transaction price is a significant element needed for a buyer & seller to reach an agreement for the purchase & sale of a business. However, there are many other negotiated terms ranging from legal elements like representation & warranties to accounting issues like tax allocation to understandings to facilitate a smooth transfer of ownership like post transaction consulting or employment and non-competition agreements. If the seller and their professional advisers seek positions in negotiations that are unsatisfactory to the buyer and their attorney, accountant, and/or bank the ability to sell the business can be problematic.
The Buyer – No transaction can be completed without delivery of financial consideration acceptable to the seller. The buyer in the transaction controls this asset and has the ability to walk away from the table until the transaction is finalized. Simply said, if the buyer does not want to do the deal, a business sale will not take place. Negotiations are a bilateral activity requiring joint participation. Many transactions have been killed by buyers who took an aggressive negotiating position that resulted in the seller walking away from the negotiating table. IBA sells a high percentage of its representation projects because it facilitates “win-win” transactions. We also recognize that a buyer negotiating in a “win-lose” posture will generally fail in the attempt in IBA facilitated transactions because at the end of the day, our sell side clients are not damaged by continuing to own their profitable, successful businesses and seeking an alternative buyer. Conversely, a “win-lose” buyer will walk away from the negotiating table with nothing to show for the effort, but retention of their money and the loss of an opportunity to another buyer.
The Broker – The professional skill set of a high performing mergers & acquisitions intermediary is a blend of the legal, accounting, finance, management, and sales professions. A top-flight business broker has the ability to listen, persuade, justify, facilitate, and problem solve in discussions and negotiations involving intelligent, confident, successful parties with defined objectives and decision-making authority. Many transactions are made or lost based on the knowledge, experience, and ability of the intermediary in the middle of the deal. A business sale is not a commodity sale. It is the sale of a sophisticated, nuanced product which frequently allocates more value to intangible assets (Blue Sky or Goodwill) than tangible assets such as furniture, fixtures, equipment, and inventory. Tom Brady is commonly regarded as the greatest quarterback of all-time in the NFL. Two metrics that support that assessment are that he has won more Super Bowls, six, than any other quarterback and is second all-time in NFL history with thirty-five comebacks in the fourth quarter in route to walking off the field victorious. Selection of the business broker to represent and negotiate the sale of a privately held company or family business is the selection of the quarterback to lead the transaction team. It is prudent to vet the historical success of the team (The business brokerage company) and the broker who will be personally representing the company before signing an exclusive representation agreement. The wrong choice can result in the signing of a Ryan Leaf to lead your team, versus a Peyton Manning, the only quarterback to lead his teams on more 4th quarter comebacks (43) than Tom Brady. Believe it or not, but prior to the NFL Draft in 1998 there was a significant debate between which would be the stronger NFL quarterback. The same error can be made in the selection of a mergers & acquisitions intermediary.
If the decision is made to sell a business, it is recommended that you set yourself up for success by taking the company to market in a position of strength in the best possible light with intention to negotiate in “good faith” with the highest caliber representation available. 4 out of 5 businesses that are advertised for sale do not sell. These numbers can be flipped on their head, by the selection of the right business broker. IBA has sold over 4000 businesses in the Pacific Northwest since 1975. We consistently sell more businesses than any other firm in the region. We presently have eight businesses in escrow pending sale before the end of the year. I do not believe another business brokerage firm in Washington, Oregon, or Alaska will put those type of numbers on the board for their clients in the last two minutes of 2019. We would welcome the opportunity to interview for the quarterback position on your business sale team in 2020.
IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, and real estate communities on subjects relevant to the purchase & sale of privately held companies and family owned businesses. IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.