Matt Gilbert
September 25, 2023
Selling a privately-held business in the United States is a multifaceted endeavor, marked by its complexities and statistically-low odds of success. Many business owners are caught off guard when they learn that approximately 80% of privately-held businesses in the US struggle to find a successful buyer. This sobering statistic underscores the critical importance of a well-thought-out, strategic, and careful approach to navigating the sale of such businesses.
Let's explore some factors that can lead to a business not being successfully sold and ways to protect against becoming a statistic. Furthermore, when a business doesn't sell, it has far-reaching consequences that impact not only the owner, but also various stakeholders who each experience unique effects.
Ground truth objectives: Owners should list all the things they expect to accomplish through the sale of their business. Then they should sit down with a transaction specialist to see if those objectives are reasonable and achievable. In our practice, we often find that sellers have conflicting objectives, making the odds of success nearly impossible. Refining and coming to terms with a realistic list of transaction objectives is paramount for setting the stage.
Align with the right transaction advisor: Professionals exist for a reason. Don’t be the seller who thinks they can do this better than the experts who do it for a living. Transaction advisors come in all shapes and sizes. Owners should interview around until they find one who gets why they are selling, can devise a process to meet their objectives, has the team to execute on this process, and has a verifiable track record that makes an owner comfortable. Every owner we’ve ever worked with has told us they never imagined how hard, involved, detailed, and overwhelming the process would be. All of them advise other business owners not to try and quarterback it themselves.
Start with an M&A Fair Market Valuation exercise: M&A fair market valuations (FMVs) aren’t like other business valuations. Those exercises serve different purposes and focus on historical data - akin to looking in the rear view mirror only. M&A FMVs study the past but also incorporate trends, run rates, new business opportunities, etc. to create forecast results - akin to looking through the windshield. An M&A FMV then marries the two sets of data and overlays comparable sales, credit market temperature, cyclicality in the business sector, and more to come up with a defendable determination of what a buyer might offer for the business under current conditions. The best valuations also include a discussion of what deal terms the seller can expect. This information is extremely useful in determining the process and effort required to meet an owner’s sale objectives.
Preparation matters: Confidentiality, marketing materials, analytical defense, and risk analysis are all key components to building confidence in buyers’ minds and anchoring their desire to navigate the mountain of hurdles on their side of the equation. Buyers should be vetted and approved before receiving sensitive information. All of this requires strong and proven processes to run efficiently.
Accounting and data support: Transactions hinge on meeting the buyer’s objectives, too. These normally include financial returns, growth objectives, and risk management. Buyers will employ forensic experts in legal, accounting, HR, and other disciplines to help them conduct diligence and identify possible areas of concern. A transaction advisor must be prepared for this and have crunched and analyzed data ahead of time in order to predict how to navigate these waters successfully.
Doing these things within a proven system, in the right order, and with an advisor who is a great marketer, negotiator, and confidante will help ensure the sale of a business falls within the 20% of those that successfully close. Doing them with a great buyer who also has a strong professional support team will help a seller transact at the upper end of the business’s FMV.
Owners/Shareholders: Unfortunately, owners and shareholders suffer tremendously when their business fails to sell. For one, they’ve spent resources and significant energy in a process that distracted them from running day-to-day operations. Additionally, for any buyer prospect who knew the business was for sale, statistics indicate they see the business as tainted for up to 3 years. What does this mean? It means the buyer thinks there must be something others found wrong since the sale failed. On average, it takes 3 years of new results for buyers to return to the table with an untainted perspective of the business and a consideration that it is a good acquisition candidate.
Employees: When a privately-held business fails to sell, it is the employees who often bear the brunt of uncertainty. Many employees may have heard about the potential sale and may be deeply concerned about their job security and possible changes in leadership or company culture that could follow. Additionally, senior managers and executives who have been part of the sale process may experience disappointment or changes in their career trajectories due to the failure.
Vendors/Suppliers: Vendors and suppliers play a pivotal role in a business's operations, relying on consistent and reliable business relationships. A failed sale can understandably raise concerns among vendors about payment reliability and the future of their contracts.
Customers: Customer loyalty can be fragile, and a failed sale can shake their confidence in the business. Customers, the lifeblood of any successful business, can become apprehensive when a sale falls through. They may worry about potential changes in product or service quality, pricing, or overall customer experience. This uncertainty can erode their loyalty and confidence in the business.
Landlords: If a business operates from leased premises, a failed sale can raise concerns for landlords. They may have uncertainty about if/when the property will be vacated and about a new tenant's reliability.
Lenders/Creditors: When a privately-held business fails to sell, it can have a direct impact on lenders and creditors who had anticipated repayment from the proceeds of the sale. These financial institutions or individuals may have extended credit or provided loans with the expectation that the sale would generate the necessary funds for repayment. Failure to sell can disrupt repayment plans, potentially affecting the lender's financial stability and their willingness to extend credit in the future.
Investors: For privately-held businesses with external investors or shareholders, a failure to sell can significantly influence their investment expectations. Investors typically allocate capital based on the anticipation of returns on their investment, with the sale of the business often being a key strategy for returning that capital. When a sale falls through, uncertainty is created regarding the timeline and magnitude of potential returns. This uncertainty impacts investor confidence and could lead to discussions or negotiations regarding alternative exit strategies or other financial arrangements to meet their investment objectives.
Competitors: Competitors in the same industry can also be affected by a privately-held business's failure to sell, albeit indirectly. Depending on the industry and the reasons for the sale's failure, competitors may need to adjust their strategic plans. For instance, a competitor who had been considering acquiring the business might need to reassess their growth strategy and competitive positioning. The failure to sell could lead to alterations in pricing, product development, or market expansion plans.
Transaction/Legal/Financial Advisors: Professionals such as transaction advisors, attorneys, accountants, and financial advisors play integral roles in facilitating business sales. When a sale fails to materialize, these professionals may find that their efforts have gone unrewarded and that their clients are left with unresolved objectives. It may prompt discussions on alternative strategies, such as restructuring, refinancing, or revisiting the business's growth plan. These advisors also become mired in guiding their clients through the complex aftermath of a failed sale helping them navigate the path forward, and potentially revisiting the sale process several years later with lessons learned from the initial attempt.
Regulatory Authorities: In certain cases, regulatory approvals or compliance may have been prerequisites for the sale of a privately-held business. Failing to sell can have implications for regulatory reporting or compliance obligations and licensure. Regulatory authorities may need to be informed of the change in circumstances, and the business may need to address outstanding regulatory requirements. This could involve additional administrative work and potential adjustments to ensure continued compliance with legal and regulatory frameworks.
In the elaborate landscape of privately-held business sales, the statistics are unequivocal - due to poorly constructed processes, unreasonable expectations, and weak representation, approximately 80% of such businesses in the US grapple with the daunting effects of failing to find a suitable buyer. This sobering reality underscores the critical importance of a meticulous and strategic approach, quarterbacked by transaction professionals running proven processes. When considering the repercussions of a business failing to sell, it becomes clear that the consequences extend far beyond the business owner. Failure to sell impacts a variety of stakeholders, each bearing a distinct impact on the business. Understanding and addressing these complexities from the outset is vital.
If any of this resonates with you, we encourage you to complete our M&A Discovery Questionnaire and talk with us to see if your business makes the cut as one who can still command a great exit in this M&A environment. We will be in touch quickly to discuss the results. Click here to take the assessment.
Gilbert & Pardue Transaction Advisors (GaP) is a Houston-based business advisory firm serving lower middle and middle market business owners from coast to coast through representation for Mergers & Acquisitions (M&A).
Matt Gilbert and Bret Pardue established GaP to provide owners of privately-held businesses – those businesses generally enjoying annual revenue of $10-$80 million – with the quality of M&A representation and value-enhancement services previously only available to upper middle and large businesses. GaP brings highly experienced executives, sophisticated financial and marketing products, proven-effective processes, and fully-integrated expertise to every engagement. No other M&A firm serving the lower middle and middle market provides the quality of representation and transactional expertise that we do.
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