Did you know that 70 percent of all businesses do not sell? Only about 30 percent of family businesses get handed down and less than 50 percent of businesses with revenues between $10 million and $50 million in revenues sell. These extraordinary numbers should be a wakeup call to business owners.
There are many reasons why businesses do not sell. These commonly include:
- It’s easier for the owner to liquidate the assets of the business rather than try to sell a going concern business.
- The business doesn’t make sufficient profits to be attractive to a buyer.
- Expectations of value by the business owner are misaligned with the market.
Other reasons that businesses don’t sell:
- Lack of a solid recurring revenue model — customer sales are one-off and there are no annual contracts in place.
- The business is personality driven. Once the lead character of the show moves on, no one wants to watch the show anymore. (Did you continue to watch “Happy Days” after Richie left? No? Neither did I.)
- The business owner is focused on their lifestyle and drawing money from the business rather than treating the business as a long-term investment.
- There is no transition plan in place and the business lacks qualified managers to ensure continuity for a new owner. According to the PWC 2019 U.S. Family Business Survey report, even though 62 percent of family leaders plan to pass the business on to the next generation, less than a third of these businesses exist beyond the founder’s generation and only 12 percent make it to the third generation.
But perhaps the biggest hurdles to selling a business are that the owners are either not ready to undergo the sales process or they’re not taking critical steps toward maximizing value (or both). Selling a business is a multiyear game. It takes time to bring the plan together, including shifting an owner’s mindset from operating a business to selling it for the best possible value.
OK, so we’ve determined that many businesses do not sell and for a variety of reasons. Most likely, it’s a lack of long-range planning. There are websites and organizations out there that offer all sorts of advice and services to help you sell your business, but the best resources are likely the advisers you already know and trust.
Here are a few ideas to help kick-start the planning process – the earlier the better:
- Clean up your financial statements:
- Are there discretionary costs or assets in the business (like nonoperating real estate) that would not be relevant to a new owner? Your CPA can help to get your books in order. Do your accounting software reports leave something to be desired? Engage your CPA to prepare compiled or reviewed financial statements.
- Consider your corporate structure:
- Whether your business operates as a C-Corporation or a pass-through entity (such as an S-Corporation or LLC), consult with your CPA and attorney to find out whether yours is the optimal structure. There might be a more tax-efficient way to structure the business if there’s a sale on the horizon.
- Update your estate plan:
- Does your estate plan consider a sale of the business? Do you have adequate insurance? Will you have sufficient assets to support your lifestyle after selling the business? Talk to your wealth manager and insurance advisor and start updating your plan. Your CPA and attorney may be key here too.
- Invest in the business:
- Have you put off the purchase of new equipment or overdue upgrades to facilities? Investing in new assets can improve top line profits while providing tax relief through bonus depreciation. It’s also more appealing to a buyer than a business with outdated, tired equipment that they’ll have to upgrade in short order.
There are plenty of other important things to address when selling your business, too many to delve into here. But, the first step in the journey is to shift your mindset. Think like a seller, start preparing and aim to maximize value.