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Positioning your Business for Sale

Positioning your Business for Sale

Posted by Connecor Team in Articles/Blog, Featured, Media Centre 14 Apr 2014

No one knows for certain, however, there is a general consensus among professional business brokers that somewhere around one out of every five or six businesses in a country with annual sales below $10 million are for sale at any given time. Among businesses with annual sales between $10 million and $50 million, it is estimated that approximately one out of every ten are for sale at any given time.

Professional business brokers also generally agree that among those businesses with annual sales below $2.5 million that are for sale, only one in five will sell. Among businesses with annual sales between $2.5 and $10 million that are for sale, only one out of three will sell. And finally, among the mid-size businesses, with annual sales between $10 million and $50 million that are for sale, approximately half of them will sell. *

Fig1: Success rate of selling a business in relation to the size of the business

The principal reason the majority of small and mid-size businesses that are for sale, do not sell is because they are not properly positioned to sell. The owners of these businesses have failed in one—or more likely, a variety of ways—to make their businesses attractive to buyers and additionally have probably failed to take the steps that will enable them to get maximum value for their businesses if they ever should sell.

The process of positioning a business for sale can take a great deal of time—sometimes years, if no prior effort has been devoted to this task. Although the ideal time to begin positioning a business for sale is the day you go into business; the next best time to consider this process is today.

“The best way to approach the positioning task is to look at a business from a buyer’s perspective-which is easier said than done.”

By far, the single most important consideration business buyers make, and the first thing they want to know about a potential acquisition is the “target’s” historical financial performance for the last three to five years. This is because there is almost universal agreement among buyers that a business’s historical financial performance is the best indicator of its probable future performance. Buyers want to see three to five years of consistent profitability, preferably trending up, however approximately flat is acceptable. Buyers will generally pass on companies with down-trending profitability and will almost certainly pass on companies with down-trending sales revenue and profitability.

Buyers also are wary of companies where annual sales, key operating costs and profitability are highly “volatile.” This is because it becomes far more difficult for buyers to make reliable estimates of what the company’s future performance will be like.

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Admittedly, to some degree, a company’s trend in sales revenue and earnings are attributable to forces beyond the control of the business owner; they are driven by the flow of (inter)national and regional economic forces, new competition, industry trends and so forth. These uncontrollable forces notwithstanding, to a very significant degree, the reported historical financial performance of small and medium size businesses reflect the conscious decision of their owners to intentionally under-report earnings and/or the owners’ failure to institute and maintain high-quality bookkeeping and accounting practices.

The factor that creates going concern value in a business is its earnings—not its assets. Thus, having a business with a large investment in operating equipment does not translate into a business with a high market value as a going concern. There are many marginally profitable businesses being offered for sale as “going concerns” that can garner more cash for the owner by closing the business down and selling the operating equipment and inventory piecemeal. On the other hand, there are profitable businesses for sale that have more value as going concerns based on their earnings than is embodied in the value of the tangible assets alone. However, among this latter category are businesses that own operating equipment not needed to support current or expected near-future sales. Such excess equipment is said to be “non-operating.” As such, it imparts virtually no incremental going concern value to the business. In this case, the owner considering selling such a business should remove the non-operating equipment from the business and sell it. Whatever price it fetches will be gravy on top of whatever price the business fetches upon sale.

“Nearly all business owners strive to increase their company’s sales revenue and earnings and generally have many ideas on how to do that.”

Perhaps the most common term used to describe a business offered for sale is its “growth potential.” This is because buyers are especially attracted to a business that demonstrates a strong potential for growth. With this in mind, a wise business owner positions his business to exploit that potential. As a business grows in sales revenue and earnings, it becomes a more complex entity. The business owner who succeeds in increasing sales revenue and earnings but fails to create an organizational structure capable of supporting that growth, with its inevitable increase in complexity, will see his or her chances to find a buyer – and receive a fair price – seriously reduced.

Thus, for any business owner offering his business for sale who touts “significant growth potential” in terms of potential growth in sales revenue as a key value driver should be able to back up that capability by demonstrating an organizational system capable of assimilating that growth in order to make the claim believable to a buyer. This task is far easier said than done and does not happen overnight. It can take years to accomplish. However, once this task becomes well accomplished, the business will become more marketable and more valuable.

The final thought on positioning to be addressed here is a proper positioning of the expectations for the future sale of a company. That is, the expectations of how much the company can sell for and on what terms.

Perhaps the single biggest reason profitable businesses do not sell is attributable to the unrealistic expectations of their owners. Rarely do small and medium size business owners have a reasonably accurate idea of the most probable selling price range for their companies. Generally, however, they harbour hope and that hope, again generally, range anywhere from double to ten times the price their business is likely to fetch—and that’s the price they ask when they put their businesses on the market. The result, of course, is that no purchase offers are ever tendered.

* Based on a consensus among US business brokers and M&A professionals