One thing all small business owners have in common is that they will eventually need to exit their business. About 50% of owners plan to sell to family, a business partner, or an employee and the other 50% plan to find a buyer in their local community and in some cases. Less than 10% will post the business online and find a buyer outside their geography. Oftentimes owners will take a For Sale By Owner (FSBO) approach to sell their business because they know who the buyer is or are just too small to attract the attention of a quality business broker.
Why A Small Business May Not Sell
According to Mike Finger from Exit Oasis, less than 20% of small businesses seeking a buyer will actually sell. Keep in mind, there are over 32 million small businesses in the U.S. and factors such as geographic location and industry can play a significant role as well as macro economic conditions like inflation or interest rates for an SBA loan.
Let’s take a look at some of the more common reasons a small business may not sell and are somewhat within the control of the owner.
Financial challenges in your business can limit your chances of finding a buyer. No one is going to buy a business that is losing money or struggling to make a profit. That said, if a prospective buyer has accurate financial information they can assess the potential to address these challenges. Keeping accurate and up to date books allows a potential buyer to dig into the details.
Too owner dependent is common if the owner is the only one working in the business because YOU are the business. Transitioning to a new owner runs the risk of losing significant revenue as customers re-evaluate their options. Additionally, owners rely less on systems and processes that can be transitioned because they can operate day to day without documentation.
Limited growth opportunities are a red flag for a buyer seeking the opportunity to expand and increase cash flow. If you have controlled growth because of limited resources or to maintain work life balance, you will want to have actionable steps a new owner can take to grow the business should they make the investment. If growth is limited due to geography, industry trends or other factors, finding a buyer may be a challenge.
Options to Selling A Small Business
If your plans to find a buyer do not work out, there are options to consider that are both viable and could provide a great outcome.
1. Sell the Assets
Your business probably has assets, physical or what are known as “soft” assets such as software, customer lists or know-how. Some of them may show up on your balance sheet today, things such as equipment, trucks, physical space etc. while others need to have values assigned to it. Selling the assets can generate cash that goes back into the business and can be used to pay down any liabilities or put cash in the pocket of the owners once they dissolve the business.
To get a sense of the viability of this option, start with a simple Net Asset Valuation (NAV) which takes total assets owned by the business and subtracts the total liabilities. Here’s is a simple illustration using this method:
For example, you have $300,000 in assets and $75,000 in liabilities, therefore the value of your business is $225,000 ($300,000 – $75,000 = $225,00).
If you choose this path, take time to clean up and repair assets before marketing them to others. You wouldn’t want equipment that is worse for wear because that could be a factor in lowering the value of your business. Make sure to keep everything fully functional and in its best shape.
2. Increase Valuation & Selling Later
You may be able to sell your business but not right now. Whether it is due to broader economic conditions or other factors, it may take months or even years to find a buyer at the right price. If this is the case, there are steps you can take to increase the valuation of your business to make it more appealing to prospective buyers.
Most owners run their business to minimize tax liabilities and many choose to have discretionary expenses like car leases covered by the business. This makes sense but when presenting the business to a prospective buyer, profitability and cash flow are key. If you are not tracking these, now is the time to start so those expenses are factored into the valuation. Eliminating any wasteful spending is important. Take a close look, even what appear to be minor expenses can add up and removing them along with discretionary expenses can increase profitability and in turn, raise your valuation.
3. Sell To Employee
This is another option that you might want to consider. This may not be the most financially lucrative choice, but it does have a number of benefits. Since your employees know a great deal about the business and how it is run, it will take a short time for them to adjust. This will also ensure that your legacy and your vision are continued.
Summary
There are multiple paths for exiting a small business and if your initial plan is not working out, there are options available. Plan ahead and have the mindset that you may need to adapt your plan as you start to market your business to potential buyers. Eventually, you will exit.