Six reasons businesses fail to sell

Many business leaders put a company up for sale at some stage during their career.

They may be entrepreneurs who have built their firm from scratch, but want to retire or simply extract value by selling the business.

Alternatively, they may be in charge of a large company that has chosen to sell part of the business because it has been underperforming, no longer aligns with the core strategy, or needs to be sacrificed to comply with competition regulations.

Either way, the process needs to be considered carefully as it can cause major upheaval and uncertainty for employees, customers, and suppliers.

Senior management are unlikely to be fully focused on running the business while a sale is progressing and this distraction can lead to the loss of key customers and personnel.

After all this, there is no guarantee that the process will necessarily result in a sale.

Why do so many companies fail to sell?

The prospect of a failed sale is particularly high for smaller businesses, where the failure rate is as high as 80 per cent. This risk falls as the size of business increases. Nonetheless, larger firms still see between 30 and 40 per cent of proposed sales fail.

So why do so many sales fail? And how can we learn to avoid failure and the distraction, disruption, and disappointment it brings for all the parties involved. Let’s look at some of the key factors.

1 Disappointing offers

People often have high expectations of generating income through a sale. The reality can be very different.

Company sales often fail to attract much interest other than the inevitable bottom feeders who are looking for a business on the cheap.

Interest can often be limited due to concerns about the business. Buyers do not like risk. When that risk becomes excessive, then bids are low or not forthcoming at all.

Before marketing a business for sale, it is advisable to source a valuation and a risk assessment. This would outline how a third party might view the business and any concerns a buyer may have.

It will also highlight if the valuation is lower than the seller had hoped. Whether they would accept this valuation is an indicator of whether it would be worth continuing with the process.

2 The buyer does not have the funds

A lack of funds to complete the purchase is a surprisingly common issue. There are plenty of time wasters out there.

I recall one attempted sale during which a potential buyer visited all five of our sites in a helicopter. Despite this, he did not have the adequate funds to buy the business.

Advisors should ask to see evidence of available funds before considering the bid. Even then, it can be difficult to secure a clear answer.

Often the offer involves deferred consideration. This usually means the buyer does not have the money and still has to raise it. Make sure you know what to expect.

3 Dependence on a few key clients

This is frequently a deal breaker when a business is highly dependent on two or three customers.

I recall a sales process in which a business made 40 per cent of its profit from a single customer. This posed a considerable risk for prospective buyers.

Unfortunately, it also posed a risk for the management team, who were so distracted by the sale process that they neglected that customer. This resulted in their biggest client moving their trade elsewhere – a disastrous result for the company.

Reliance on a small number of suppliers can pose a similar problem. I saw an invoice discounting business (which lent money to companies against unpaid customer invoices) that relied on two or three affluent individuals to provide the funding.

This dependence on a few individuals rendered the business unsaleable, because if one of them of pulled out, it would be very damaging for the company.

4 Over-reliance on the owner

Often with entrepreneurial start-ups and family businesses, critical contacts and relationships are owned by one person.

This creates a risk for potential buyers, because that person may lose interest or leave once their business has been bought. Those critical contacts might exit with them.

Most buyers want initial certainty of the management. As a result, they may demand restrictive covenants to safeguard their investment.

This can include a guarantee that the owner will not leave the company for a certain period of time after the sale is complete, will not set up a competing business within an agreed geographical area or timeframe, or will not solicit former clients with a view to poaching their custom.

5 Markets decline before the sale is complete

Trying to sell a business in a declining market, regardless of whether this is because the industry is cyclical in nature or is facing economic headwinds, usually ends in disappointment.

As sales slide during the process, bidders are likely to keep cutting their offer. This means the process becomes more protracted and bids fall even further as the market continues to decline.

Eventually, the outcome is usually the same – the seller pulls out. Therefore, it is advisable to attempt a sale only when markets are rising.

6 Lack of important information

Selling a business requires multiple documents to be made available for due diligence. This includes accounts, legal documents, analyses, and forecasts.

Buyers dislike uncertainty, so a comprehensive due diligence pack helps the process. When critical information, such as forecasts, are not available, buyers usually discount the price.

The worst-case scenario is that they may withdraw their interest altogether. This is a particular danger for smaller businesses, which may struggle to absorb the disruption created by the process.

What to consider when selling a business

Before putting a business up for sale it is important to consider what to do if it fails to sell.

To avoid disappointment source a valuation first. Consider what is the lowest acceptable price. This may well be tested in the bidding process.

Ensure you stay in control of the process as a seller. It is too easy to defer to the experts who do this every day. However, these experts frequently have different objectives to the owner as they maximise their fees with a successful sale.

If you feel uncomfortable with any element of the process then make it known.

Excessive dependence on customers, suppliers, or management is a major concern so diversify these as much as possible before you try to put the business up for sale and ensure you have a realistic but positive forecast.

Proper documentation is critical, including accounts. If these contain commercially sensitive information, then let it be known and hold it back to the very final stages.

This is particularly important if any competitors enter the process as prospective buyers. Most will dip out once they have to start spending money. Think whether you want to entertain them or not. They may be the most likely buyers, but some are definitely just there to gather information.

Most of these dangers can be mitigated to an extent but, ultimately, selling a business can be risky. It can harm the company, whether the sale is completed or not.

It is important to understand these risks before embarking on the process. Selling a business can bring significant benefits, but it is complex, demanding, and may not deliver the intended results.

Further reading:

Four rules to avoid failure in mergers and acquisitions

How to time takeover deals to maximise success

Six tips to find hidden benefits in tech M&A

Why are business empires broken up?

John Colley is Professor of Practice in Strategy and International Business at Warwick Business School and author of The Unwritten Rules of M&A: Mergers and Acquisitions that Deliver Growth - Learning from Private Equity. Before joining academia, he was the Managing Director of a FTSE100 company and Executive Managing Director at a French CAC 40 business.

Learn how to add value and avoid common pitfalls in M&A with the three-day programme, Mergers and Acquisitions: How to Maximise Success, at WBS London at The Shard.

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