The Common Reason Why Businesses Fail to Sell and How to Avoid it
The common reason a business fails to sell.
In my experience, the common reason businesses fail to sell is that there is little distinction between the business and its owner. It’s something called the “Owner’s Trap”.
Let me explain what I mean by the “Owner’s Trap”
It is where the business owners fail to separate themselves from the business.
Does this scenario sound familiar?
Taking the sales system, for example. Owners are genuinely good at selling. They enjoy it. Most are very good at it. They enjoy the banter with the customer; the bargaining, the entertaining…
These relationships can lead to offering too many products or services to too many customers where the margins are unknown. Both with the product or service or the customer’s margin. This leads to the owner believing they are the only person capable of delivering so other employees do not become involved.
The problem now comes when we come to sell it.
The owner believes the business is worth much more than a buyer is prepared to pay. What is the business worth to the buyer? They look at it in terms of the risk. How much time and money will be required to extricate the owner from the business? What are the risks of it all going wrong during the integration period?
An owner’s time is limited to the number of hours they can provide that customer service. if the employees can be shown how to do this, a business can be built beyond the owner’s time.
Consider McDonalds for a moment. Did you know there is a 72-page manual on how to treat customers? So, each customer wherever they are based receives a consistent experience no matter who serves them. Can you train your employees to do what you do? Maybe by setting out the process you have in the form of a written or, preferably in the world of the millennial, a series of short videos. This ought to be able to build the business beyond the owner’s time and to make it less dependent on the owner. Moreover, the risk to the buyer is reduced. Thereby increasing the value of the business.
So, what can be done?
Firstly, I do believe it requires a change of mind, a willingness to delegate and to set up procedures. Be prepared to test the procedures to see if they work.
One of the questions I pose to owners looking to sell is: If you announced without warning at noon one day you were leaving in five minutes and would not be back until tomorrow, could the business cope? What would happen if you extended this period to two days, a week, a month?
Everything else being equal, a buyer prefers business where the owner works less hours rather than more. Where the owner looks at ways to increase sales, that’s volumes and prices; investigate new markets and considers other markets for existing products, then the risk to the buyer is reduced.
The answer lies in effective delegation, always be recruiting, making yourself redundant and focusing your activities on the important, urgent matters. Delegate the unimportant, non-urgent to minimise the time spent problem solving. Instead use the time to look at the important, non-urgent matters. For example, the business plan, who a buyer might be and the other tasks I referred to above.
The unimportant, non-urgent matters can be delegated entirely.
Here are some of the signs you are in the owner’s trap
- Approval of all purchase orders and invoices.
- Authorising sales quotations, invoice and refunds.
- The annual revenue is flat year-on-year.
- You do not have a proper, business-free holiday.
- A majority of the customers are known to you by their first names.
- You organise customer entertainment.
- Your in box receives so many copied into emails each day.
Let’s take some of these and consider some first steps.
Standard Operating Procedures
Overall, these need to cover these areas.
- Your ways of serving customers, and
- Behind the scenes functions.
Avoid using standard templates since, your business is unique, and these will not show the true value of your business.
The advantages of Standard Operating Procedures
These benefits include providing the acquirer confidence that your business will succeed without you. They set out how the business makes money.
Moreover, they show how well the business does if you were out for a month or more.
Most SME businesses are sold on a multiple of profit. So, put simply the higher the profits and or the higher the multiple, the greater the value of the business when you come to sell.
Furthermore, there is the structure of the sale consideration. These procedures should avoid something horrible known as an earnout. Here, the full consideration for the business is partly dependent on future trading as defined by turnover or profits – whatever these are. Earnouts are really difficult to negotiate and in my experience do not always deliver the expected value.
Standard Operating Procedures will minimise the possibility of an earnout being considered. They give you a bargaining tool as you can leave within a few weeks of the sale mitigating the need for an earnout.
So, if it makes sense why are Standard Operating procedures not used?
The issue is that owners know their business, but they do not know what they do to run it.! It may sound surprising yet running the business is natural to them. To teach someone how to do or communicate how to do it, well that is a different matter.
When I decided I would leave my business, I realised I had to delegate more. The first time I showed someone what I did took ages. The next time much less. By the third time the person was making a much better job than me and was more efficient than I!
So, if I asked a room of businesspeople: “Do you want to sell your business?” a few hands might go up. If I asked, “How many would like to know they could sell your business if and when you are ready?” I guess a lot more hands would go up. It’s not about selling the business as such. It’s about building a more valuable company.
If you feel you want to do this, then I would be happy to have a call with you without obligation if you feel this would be of value to you.
I look forward to hearing from you.
If you would like to read more of the Overview of Selling a Business, please return to this page on the website.
If you would like to listen to a Podcast on Anchor about my services, then please click here and open the hyperlink.
More reading, help and advice from Assynt Corporate Finance
Below you'll find links to other articles that offer help and advice about selling your business, what to look for, considerations and recommendations.
If you would like further help, contact us, we'd be only to happy to discuss your sale and can help if we can.