Why a business does not sell – Part One

There are many businesses for sale at any moment. That is, the buyer has choices. Most business owners are so close to the ownership and operation of their business they think that because it works for them it surely must appeal to one buyer that would like to buy their business. Part of this perception, in my opinion, is because you never see a for sale sign on a house that says “Unable to sell” or something similar.

Because my business is helping owners sell their business I keep track of reasons a business does not sell. There are over thirty reasons I’ve noted so far. I don’t plan to put them all in one article but I do plan to write about each of them in the hope that it will help business owners trying to sell their business or have their business on the market and wondering why it may not be selling.

What’s interesting is that the seller often is able to fix or manage some of the reasons why a business does not sell. Sometimes they can influence reasons a business does not sell and sometimes there is nothing they can do; it is just part of the capitalist system.

Reasons a business does not sell and what the owner can do about it.

Financial statements are incorrect

The financial statements reflect so much about the business and in particular the owner. A quality set of financial statements show the owner not only cares but is actively involved with the operation of the business. It also shows that the owner or seller knows the direction the business is travelling and are able to make the necessary tweaks. This is critical to a buyer. It’s also critical to a lender who the buyer asks to provide finance.

How can the seller fix this problem?

The seller can easily fix this problem by keeping a clean set of books or hiring a third party such as a CFO or book-keeper to do this for them. The seller may think this is an extra expense they do not wish to incur but that would be very short-sighted. A quality set of financial statements show the direction the business is going. As has been said, if you can’t measure it you can’t manage it. Additionally, the seller cannot afford to have incorrect financial statements. As I’ve seen before many times, if the financial statements are wrong it means other items are wrong. For example, if the business has employees and the payroll is not paid correctly, it can lead to huge fines with the IRS that are simply a waste of time and money.

Financial statements are not professional or worse

Recently I had a seller provide a set of financial statements so I could do a valuation of their business. As soon as I saw the Profit and Loss I could tell the document was incorrect as it showed money the seller had recently borrowed. A loan does not appear on the Profit and Loss but goes on the Balance Sheet. The interest paid during the period shows on the Profit and Loss. Once you see a simple mistake like this it removes the credibility of the financial statements and the owner.

Another simple mistake made by some business owners is to run their personal expenses through the business or what is called co-mingling. Not only do co-mingled financial statements again reflect on the owner but they make the buyer doubt that the income is over stated or the expenses are under stated and therefore inaccurate.

Read More: Here is more information about the steps to sell a business.

How can the seller fix this problem?

The solution is the same as the last problem. That is, hire a third party such as a CFO or book-keeper to do the financial statements for them. There is so much upside to the seller as not only will it increase the chances of the business selling but also provide an accurate set of markers to steer the business. If you want to drive from Sacramento to a specific address in Los Angeles you need a GPS or road map to guide you. It is exactly the same when running and a business and now trying to sell it.

Financial statements do not show all income

This problem is instant death for the seller of a business if they want to get the true value of the business.

One of the first metrics a buyer wants to know is the gross sales of the business. An experienced buyer will know that a certain percentage of gross sales for a business in a certain industry indicates its viability. For example, a sandwich food shop should have at least $500,000 in gross revenue to make about $60,000 to $90,000 per year in net income.

If the owner chooses to put cash in their pocket and not report all their sales they cannot expect to get full purchase price for the business as the buyer will be comparing this business against other businesses.

How can the seller fix this problem?

As you can guess, the solution to this problem is real simple. Simply report all your sales. Those owners that don’t report all their sales, then decide to sell and so now start reporting all their sales run into a couple of problems. Suddenly starting to report all your income can trigger an audit with the IRS. Alternatively, if the buyer of the business reports all the income while the seller did not, that can trigger an audit for the seller who will be caught unprepared as the IRS are not going to provide advanced warning to the seller. And this is the interesting part. It is not up to the IRS to prove the seller under reported the business income. It’s up to the seller to do so.

Selling a business is never easy. For the owner that wants to get through the process as easily as possible by selling the business for the highest price and as quickly as possible, follow the above suggestions. This article is part of a series and covers other issues with suggested solutions.

Are you thinking about selling your business and move to your next challenge? Would you like to know the value of your business? If you would like more information please visit my website Business valuation.

For more immediate help you are welcome to send an email to Andrew Rogerson or give me a call on 916 570-2674.

The article Why a business does not sell – Part One first appeared on Andrew Rogerson and Rogerson Business Services by Andrew Rogerson