Why practices don’t sell and what to do about it
There are numerous discussions I have had over the last 12 months with business owners who have taken their practice or a book of business to market and failed to sell. These discussions have been where the Vendor has managed the process themselves as well as where they have used a third party agent. For us it is important to revisit the process and analyse what went wrong. Identifying the reasons is critical so as not to repeat the same mistake twice.
Below is a list of the main reasons practices or books fail to sell
Badly prepared business data
Our analogy is to think of the scenario of purchasing a vehicle that has had a previous owner. The question is, “Does a car with a well documented log book increase the value of the vehicle?” The answer is clearly yes, so let’s look at the reasons why well presented data increases the value of a business?
More information reduces the buyer’s doubt and increases their comfort level. Tidy, well presented data and information, is a representation of the business which should translate into an easier and safer transition. Lack of information increases the buyer’s perceived risk and higher risk should translate into lower price offers. Lack of information also increases the likelihood of the Buyer believing the Vendor is hiding something. This affects the level of TRUST which from our experience is vital for a deal to conclude successfully. Imagine trying to buy a car and the seller refuses to allow you to look under the hood. As a buyer you would either stop right there, or offer a ridiculously low price. Badly prepared business data is a common reason businesses do not sell.
Funding or lack of it
This is a frustrating one. A heads of agreement which is subject to Finance, leaves the fate of the business sale in the hands of the bank or the financier. If the bank says no, and the buyer has no alternate funding options, it can mean waisted hours and significant expense. Prior knowledge about a buyers funding capacity is vital in the early stages of qualifying interested acquirers.
Lack of Trust
I always recall the story of the perfect deal that fell over at the final hour. In my opinion this was the perfect deal for both buyer and seller. It meant a significant upside for the buyer due to a resource that would allow the buyer to make the rest of its business considerably more profitable. For the seller it meant a achieving a significantly higher than expected price outcome. After 6 months of negotiating and after a complex contract had been written up and agreed upon I received a call from the buyer. The papers were due to be signed the following morning. The buyer was pulling out! Why? It came down to a white lie the seller told the buyer in the early stages of their meetings. It was hardly significant but it bothered the buyer significantly. The buyer had a niggling feeling that if the seller was dishonest about a small thing like that, then “What else could they be hiding” or what else are they being dishonest about that they were un aware of . It seemed insignificant at the time to the buyer but it obviously had a far greater impact than the buyer or seller could have anticipated.
A seller unable to commit all the way
There is always the case of the Seller who believes that they are ready to sell the business only to find when it really came down to the crunch they were unable to sign on the dotted line.
There is a lot of emotion involved in selling a business, particularly if it is a business you built up yourself. Often Vendors do not anticipate the level of emotion that can exist in the sales process. Many anticipate a smooth ride, which is nice when it happens, however all too often the negotiation and subsequent transition can be a highly stressful and emotionally taxing experience. Getting cold feet from sellers is a common deal killer.
A buyer kicking tyres
A tyre-kicker appears interested in the practice and goes through the process in order to receive an Information Memorandum . They may then progress to a meeting.Their intention is to get information from you – so unfortunately the more you give them, the more they will hang around. Smoking out time wasters is important as selling ones business can be a time consuming exercise.
Unreal price expectations
A Vendor holding out for a price that does excludes buyer’s ability to get the business financed. i.e. the asking price is way out of whack to what a bank is prepared to finance an acquirer is therefore limited to an acquirer who are self financed. Unless there is a significantly compelling reason to purchase the business at a level way above the market one can expect to either have the business on the market for al ong time or have to go back to the market at a lower price point and a weaken negotiating position.
Arrogance and not listening
I heard a story recently where an acquirer visited a Vendor who told them they would put them on a shortlist and let them know if they would be invited back to make an offer. It was done in an arrogant way to the point the buyer said don’t bother. Little did the Vendor know that the acquirer was prepared to pay far more than what was being asked. Another example was a buyer who bullishly made assumptions about the Vendor inferior systems and although they may have been correct the parties did not get to the next stage purely because of an ego clash that halted any further discussion. Often the synergy between the 2 parties and a general liking for one other as as important s the price and the terms of the deal.
Thinking it is going to be easy and getting frustrated when its not
For most selling a business is not something one would do regularly. For most it is the first time they have been a seller. Selling a business, particularly one which has been build up fro scratch can be an emotional experience. When the sale goes smoothly count yourself lucky but there are many milestones along the way to a concluded sale. Anticipating hiccups along the way will build your resilience as a seller.