Why Some Businesses Don’t Sell

By: Keith Olson, Williston Center Director

In the SBDC system, we often work with clients looking to buy and sell businesses. A common question I hear is, “Why don’t some small businesses sell?” It’s disheartening when a business owner reaches retirement but can’t find a buyer, sometimes leading to a complete shutdown. Walking away empty-handed after years of hard work is avoidable if owners understand why some businesses don’t sell. In fact, about 80% of listed businesses do not sell.

William Bruce, a trusted resource for our SBDC network, defines small businesses as those with less than $10 million in sales—this includes many of the clients we work with daily in North Dakota.

Unrealistic Price Expectations

This is likely the top reason for a business’s failure to sell. When a business owner comes in, they have a value in their mind based on something they have read or heard from a friend or acquaintance. This is seldom grounded in reality. In my experience, 80% or more of my clients have a value that is not realistic, and a buyer could never pay debt service and have enough left to live on.

Most owners quickly learn that the market sets the price, not what the owner may think or have heard.

So if you don’t take anything else from this article, when you start thinking about selling your business, get a professional valuation done.  It will save you a lot of time and grief. One of my primary beliefs is that you can’t manage what you can measure…that certainly applies here.

Inadequate Books & Records

Missing or messy records make buyers suspicious and are another common reason why businesses don’t sell. Unfiled tax returns or poorly kept financial records make it difficult for buyers to trust the numbers. Working with an accountant to get your records in order is essential. If you don’t have an accountant, now is the time to get one.

It is not a deal killer if you’ve been running some “unnecessary” expenses through your business to lower Uncle Sam’s tax bite.  Those “discretionary” expenses can be adjusted out in an exercise called recasting to show the true cash-producing ability of your business.

Lack of Proper Representation

Many owners try to sell their businesses without a strong team of advisors, often to avoid commission fees or other costs. However, experienced professionals can make the difference in closing a successful sale. Your team should include:

1.  A business lawyer: Experienced in business sales, they can help navigate legal complexities.
2. Your accountant:  o advise on tax implications and other financial considerations.
3. A professional business broker: Many people hesitate to hire a broker due to fees, but the right broker can significantly improve the chances of a sale. Avoiding this discussion could put years of hard work at risk.

Negligible Earnings

If the business is losing money, it really has no ongoing business value.  Speaking frankly, it’s worth only the depreciated value of the tangible assets of furniture, fixtures, and equipment.

However, if there is a reasonable opportunity to turn the business around with additional working capital, marketing savvy, or by other means, it may have some value to a few buyers.

If you have worked for years to minimize tax, you have likely already been paid for the business and you aren’t able to sell it twice.

Lack of Acquisition Financing

This issue follows the one above concerning negligible earnings.  If a business is not making a profit, no lender will make a business acquisition loan to anyone to purchase a company that’s losing money.

There are other reasons, also, that financing may not be available.  This could involve the type of business, a declining overall market for the company’s products or services, or the macroeconomic cycle.

In some situations, if the seller is sure of the buyer and the viability of the business, seller financing, after a significant down payment, might be the only way to transfer ownership of the company.  But make sure you, as the seller, are fully aware of the risks.

In Summary

This can serve as a real world view of the business sales process and the reasons why some small businesses don’t sell.  However, with proper planning, some of these problems are avoidable.

Thanks to William Bruce, an Accredited Business Intermediary (ABI) and Senior Valuation Analyst (SVA), for providing valuable insights. William specializes in assisting buyers and sellers in the transfer of privately held business ownership. He currently serves as the President of the American Business Brokers Association.

Visit our website to access the ND SBDC Exit & Succession Planning Guide.