Your Company Failed To Sell -- Here's Why

Small business owners have an opportunity to learn from their peers who have attempted and failed or, more importantly, have successfully sold their business during the second quarter of 2014.

The International Business Broker Association (IBBA)  and M&A Source, in partnership with the Pepperdine University, have summed up survey results from 250 respondents about businesses being marketed and sold in the United States. The data was drawn from businesses listed for sale and sold during the second quarter of 2014 from “Main Street,” defined as those with a value up to $2 million, as well as from the “Lower Middle Market,” defined as those with a value between $2 million and $50 million.


EBITDA Multiples Increase with Size
Unless you own a business in a hot industry, such as Online Services, don’t expect your business to be valued by a buyer much above the normal EBITDA Multiple ranges customary to businesses similar in size to your business. As you can see in the chart above, the underlying median EBITDA Multiple used to calculate the value and purchase price of a business on Main Street and in the Lower Middle Market increases with size. Relatively speaking, if your business is on the upper end of the Main Street sector or in the Lower Middle Market, buyers considering the acquisition of your business will be more willing to increase the EBITDA Multiple they use to assess its value. Simply stated, grow the size of your business and its value will increase in the eyes of a buyer.

Deal Terms Needed to Close the Sale
If you want to avoid buyers asking you for seller financing, growing a business to a $5 million valuation will go a long way towards achieving that goal. In this survey, not one buyer sought seller financing when the business purchase price exceeded $5 million. On the other hand, for those businesses with purchase prices in the $500,000 to $1 million range, nearly one out of five buyers required the business seller to accept some portion of their payment in the form of a Seller’s Note Receivable.

Earn outs continue to show a strong presence in deals that have price tags of $5 million to $50 million. The inclusion of an earn out agreement in the deal terms is due typically to the buyer and seller needing to bridge the valuation gap and is especially useful when the business is growing fast.

First Time Business Buyers Dominate Most Acquisitions
The survey revealed first time buyers outnumbered all other types of business buyers during the second quarter of 2014 for businesses under $1 million as well as in the $2 million to $5 million valuation range. Whereas strategic buyers dominate the sector with businesses valued between $1 million and $2 million. And one half of all businesses with values between $5 million and $50 million were acquired by Private Equity Firms with the balance split between strategic buyers and existing business owners seeking additional new business opportunities.

Many first time business buyers lack sufficient financial education and the experience to appreciate the all nuances of private business financial reporting. This causes uncertainty and angst for the first time buyer when they see the seller and his or her business broker making adjustments to profit and loss statements to produce normalized EBITDA. One of my first time buyers recently responded to a messy set of financial adjustments presented by the seller’s broker by confiding in me that he felt “as if he was in the middle of an ugly game of smoke and mirrors.”

It doesn’t have to be this way. Business owners who streamline their financial records by removing personal expenses and properly compensating themselves and their key employees will be more likely to close their deals.

Seller Mistakes Preventing Deal Closings
Seventy-eight percent of the Deals valued less than $500,000 terminated without closing during the second quarter of 2014. For Main Street USA, this is a tragedy and one which deserves a closer look.
According to the survey, “the biggest mistakes sellers make that hurt their chance of successfully completing the deal are:

• Unrealistic Seller Expectations
• Poor Financial Records
• Declining Business Sales
• Waiting Too Long to Sell the Business
• Seller Can’t Let Go – Emotional Ties to the Business”

Business owners will be well-served if they seek advice about the true fair market value of their business early on and understand the amount of time it will take to market the business for sale and ultimately close the deal. Unfortunately for the small business owner, having three years of financial records in good order is nearly unheard of by most business brokers. Taking steps to address these two issues would go a long way towards improving the likelihood of closing a business sale.

As for the matters related to holding on too long, one only needs to consider the final statistic drawn from the IBBA/M&A Source/Pepperdine study in order to recognize time is of the essence: Nearly two-thirds of the new business listings for sale during the most recent quarter have been by Baby Boomers.

Frankly, that’s the tip of the iceberg and  if you are a Baby Boomer business owner, the market to sell your business is about to get very crowded.

I welcome your thoughts about the survey.  Are the survey results consistent with your experiences?

I’m Holly. Advocate for the Entrepreneur who wants to learn, grow and succeed.  Founder of  Exit Promise. Connect with me on Twitter and Google+. Article at:
Your Company Failed To Sell -- Here's Why:

For additional information regarding Florida business sales, acquisitions and valuations, please contact Eric J. Gall at info@buysellflbiz.com or 239.738.6227. Also, visit our Florida Business Exchange website at www.fbxbrokers.com and my personal website at www.buysellflbiz.com.