Is your business prepared to withstand a catastrophic event? In this episode, Michelle Seiler Tucker takes a closer look at a startling statistic about selling businesses and why most businesses are not sellable. Diving into the dramatic changes in the business landscape over the years, Michelle discusses the importance of planning your exit and being ready for any internal or external catastrophic event. She also explores the business life cycle and the optimum time to sell your business. Tune in and learn how you can plan to make your business ready for sale anytime.
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Why 8 Out Of 10 Businesses Don’t Sell
We’re going to talk about selling businesses and the startling statistics. According to Forbes, 8 out of 10 businesses will not sell. Some experts say 90% of businesses won’t sell, but I’m going to go with Forbes that says 8 out of 10 won’t sell. There are 32 million businesses in the United States. They’re employing over half of the United States workforce. When I wrote my first book in 2013, Sell Your Business For More Than It’s Worth, and I did the research, it used to be 85% to 95% of all startups in 1 to 5 years would go out of business. Now, the business landscape has changed dramatically. When I wrote Exit Rich in 2019 and did the research again, I was shocked. In fact, I had to do the research over and over again to make sure it was accurate.
It’s only 30% of those businesses who have got a business in the first 1 to 5 years, but what’s changed dramatically is the business landscape. Business owners who have been in business for over ten years are at severe risk of going out of business. Over 70% that’s been in business for over ten years will go out of business. That’s out of a sampling of 27 million businesses. We’ve talked about this before. You hear about it in the news all the time. The big box stores have closed, ToysRUs, JC Penney, Stein Mart are closed. JC is closing down on 100 locations, but you’re not hearing about the small business owners on every street corner, in every town, across our great nation that are going out of business. A lot of these business owners are wanting to sell but their business is not sellable due to a multitude of reasons.
The number one reason that businesses are not sellable is because the owner did not plan their exit. Owners never think about selling until they have to due to an external or internal catastrophic event. Lots of owners are thinking about selling because of COVID and the business is going down. All businesses think about selling because of health issues, disputes, divorce, etc. The problem with selling when a catastrophic event has occurred, as the business is typically turning downward and the business is not worth much at that point, the best time to always sell your business is when your business is doing well. You heard me talk about the life cycles of a business as a human. The best time to sell your business is when your business is in that healthy adult stage.
You’ve got to think about your exit and what you want. We did an episode a while back called Plan Your Exit, the GPS Exit Model. The other reason why businesses are not sellable is because many business owners are not operating on what I call the Six Ps, and buyers want to buy a business that is doing well, sustainable and scalable. They don’t want to buy a business that’s in trouble. We talked about the five different types of buyers and the only buyers that buy businesses that are in trouble are turnaround specialists. One of the number one issues why businesses don’t sell is because they’re not sellable for the price tag that the owner feels they need in order to exit their business.
Sellers will come to me and say, “Michelle, I want to sell my business for $10 million.” “How did you come up with that number?” They always tell me, “I came up with that number because that’s what I need to get out of debt, pay off my debt, retire on, buy another business on or to travel around the world.” Business owners are basing the value on their needs, what they need to do next. They’re not basing it on value, what the business is worth now. It was very important that when you look at selling your business, number one, you plan your exit, you come up with your destination, your end game, what you want to sell your business for, and then you build that business to sell and have massive value so somebody is willing to pay you top dollar for it.
That’s the number one reason that businesses are not sellable because they’re not worth what the owner needs to exit. The owners end up staying in the business. Unfortunately, most of them don’t innovate. They don’t market, so the business continues to go downward, lose market share, lose footprint and the numbers are turning downward. At that point, they have a losing business and nobody wants to buy. They’re typically forced into selling for pennies on the dollar, closing their business or even worse, having to file bankruptcy. Nobody wants to file bankruptcy.
You don’t just lose your business assets when you file bankruptcy, you’re losing your personal assets too because most business owners co-mingle their business assets and their personal assets. Somewhere along the way, you signed a personal guarantee, somewhere along the way you took a mortgage out on your home. That’s the number one reason that businesses are not sellable but there are many more. The other reasons businesses don’t sell is due to lack of the six Ps, lack of operating all six cylinders, all six Ps. In many cases, the owner is the business. If you take the owner out of that business, there is no business. Think of different businesses that everything is any owner’s head. We have a manufacturing business we’re trying to sell right now. It’s two partners.
“The best time to sell your business is when your business is doing well.”
They have a few employees but you take those two owners out of the business and they’re both in their 70s, there is no business left. All the IP is in their head. They haven’t created a management team. The business can’t operate without them. They don’t have any processes. Working with them to sell the business and create a business versus a glorified job and what should go to work every day but that’s a big issue and that’s one of the number one reasons businesses don’t sell is because the owner is the business. Buyers want to buy a business, not a job.
The second reason why businesses are not sellable is because of product. Many business owners are in a dying industry, not a thriving industry. Remember, 70% of businesses will go out of business after being in the business for ten years. You have to look at your product and ask yourself, “Is my product on a cutting-edge? Is it on the way up? Is it on the way out?” Unfortunately, many owners have not continued to innovate and market. Somewhere along the way, they stop asking their clients, “What is it that you need? What is it that you want? What will make it easier to do business with our company?” They forgot about the customer experience. They’re not looking at what the competition is doing to make it easier for their clients to do business with their competitor. They become complacent.
When buyers look at a business, one of the number one things they’re going to look at is the profit, the service. Is it on the way up or on the way out? Since COVID, things have changed dramatically. Industries that were once dying are now thriving. Industries that once was dying, restaurants hospitality, these industries are dying like movie theaters but industries such as home goods, eCommerce, online education, home sports, gaming, all of those industries are thriving. Anything home related is doing great because consumers stop traveling, start taking vacation. What are they doing? They’re spending money on their home. Construction is up. Look at your products and ask yourself, is it on the way up or on the way out? If it’s on the way out, you better start innovating.
You need to pivot and start innovating so you don’t go out of business. Process is another reason why businesses don’t sell, believe it or not. Many businesses are dependent upon the owner who doesn’t have efficient, productive processes and they don’t have a number one. Number two, their employees are not trained on processes. Processes is another big one that you want to make sure and then proprietary. I’ve had buyers back out of buying businesses because the owner’s intellectual property was not protected. If the owner’s IP is not protected, then the buyer is going to get cold feet. When buyers buy businesses, they want to minimize the risk. They want to buy a good business that operates on its own. You’ve got to look at your IP and ask yourself, “Is my name trademarked? Do I have a federal trademark?”
Have you protected your products with a patent? Do you have any patents pending? If you have a manufacturer, distributor or somebody is in your supply chain that supplies your goods and services in which for you to turn around and sell to consumers, do you have agreements with them? I will tell you, we’re working with a company that has a supplier in Canada and has zero agreements with their supplier. If that supplier falls through, they’re practically out business. It’s very important to make sure that you have agreements in place. Also, make sure we have customer agreements in place. Customer agreements drive value. Customer agreements will help get you a higher multiple but most importantly, make sure all of your agreements are transferable. 99.9% of all transactions are asset sales, not stock sales.
You have to make sure that you add language that the agreements are transferable. I will tell you, in my years of business in the trenches, I only have seen one owner make sure that they have transferable language. It’s very important to protect your IP. If you don’t protect your IP and you get in a lawsuit because you’re having to fight over your company name, logo, slogan or your products, anything like that, then that’s going to cost the company money then the buyer is going to want to back out of the transaction.
The other thing that you want to make sure your business is operating on is patrons. You want to make sure you have diversified clientele that you don’t have customer concentration. Buyers get very weary and nervous when they see a company have 60% or more tied up in one customer. If that business loses that one customer, what happens is that business is going to go out of business. Customer diversification is huge. There are ways sometimes around it because if you have a contract that’s transferable with a big company and that business wants to get their foot in the door with their products and services, then they might be comfortable with buying a business that has customer concentration.
“Buyers want to buy a business, not a job.”
For the most part, most buyers are very nervous about customer concentration. You want to make sure you diversify. The last thing that you want to make sure your business is functioning on is profits. You want to make sure your business is making money. Most businesses are not sellable because they are not profitable. They will not sell for the price tag that the owner needs, and wish to retire or enter the next phase of their life. That’s where the problem is. If a business is worth $1 million and they saw it says, “I need $10 million,” we’re never going to get there.
We’re never going to be able to bridge that gap no matter how creative we get on a structure. What we have to do is build value. We have to build value in the business to get it to a $10 million company if that’s what the owner needs. Remember, a buyer does not care about what you need to retire on. A buyer does not care about what you need to buy another business or enter the next phase of your life. What buyers care about is what’s in it for them. What is the value for them? How is this going to change their life? How is this going to change their business? How is this going to catapult their business to the next level? That’s what buyers care about.
It’s imperative, and you’ve heard me say this over and over again, to build your exit from the beginning. Build your exit from the beginning. Don’t get caught with your pants down and all the sudden, “I have to sell.” You owe $5 million in debt and your business is worth $500,000. You must plan your exit. Your business is your biggest asset. Therefore, it’s going to take the most planning. Selling businesses are very complex. A lot of moving parts, caveats and businesses need to be in good shape. It’s a competitive market. Think about it. There are 30.2 million businesses in the United States.
At any given time, 30% to 40% will be up for sale. That’s a competitive market. Buyers have businesses to choose from. Unfortunately, there are more businesses that are not doing well versus businesses that are doing well but buyers have a pick of the litter. Buyers can choose what business is right for them. A buyer’s market as far as finding a business that meets our buying criteria. To recap, what do buyers want? What do buyers not want? Buyers do not want to buy a job. Buyers want to buy a business that’s functioning on all six cylinders, a business is functioning on all six Ps that we discussed.
Buyers want to make sure that the business is going to be scalable, going to be able to get a return on their investment and they’ll be able to have potential to grow that company. If a buyer can see potential in your business, they’re not going to purchase your business. According to Forbes, 53% of business owners never think about selling regardless of the fact that they are 53 years or older. This is your biggest asset. Plan for your exits so that when you’re ready, you can exit rich. Thank you very much and thank you for joining us on another episode.
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