Key takeaways
- Most businesses that fail to sell are not bad businesses, they are businesses with one or two defects that a buyer cannot finance or cannot survive.
- Owner dependence, unverifiable earnings and a lease that cannot be transferred are the three most common, and all three are fixable with time.
- Price is the defect sellers least like to hear about and the only one that can be fixed overnight.
- A valuation names your defects early enough to fix them, which is worth more than the number itself.
Many businesses in British Columbia go to market and do not sell. The owners conclude that buyers were not serious, that the market was slow or that the adviser did not try. Sometimes that is true. More often the business had a defect that every serious buyer found, and nobody told the owner in time to fix it.
This guide lists the defects we see most often at BizSell.ca, why each one stops a sale, and what fixing it involves and how long that takes. Some are quick. Most are not, which is why we encourage owners to find out early. A valuation is the usual way, and the report is more useful as a list of defects than as a number.
The owner is the business
The most common defect. The owner holds the customer relationships, does the estimating, makes every decision and is the person the staff and suppliers call. A buyer looks at this and sees earnings that leave with the seller. Lenders see the same and will not finance the full price. The result is either no offer or an offer with a long earn-out and a low cash component.
The fix is to make yourself unnecessary: delegate decisions to a manager with real authority, introduce customers to other people on the team, document how work is done, and then take a long enough break to prove the business runs. This takes a year or two to show in the business and in the way staff and customers behave. Start now if you plan to sell within three years.
The earnings cannot be verified
Statements that are late, prepared internally, inconsistent with the tax filings, or built on add-backs that cannot be documented. Revenue that includes cash a buyer cannot trace. A buyer's accountant will test the earnings against the bank, the sales tax filings and the tax returns, and where they do not reconcile the buyer either walks or prices the business on what can be proven, which is less.
The fix is clean, timely, professionally prepared statements for at least two full years before going to market, a documented add-back schedule, and the discipline of putting every dollar through the books. There is no shortcut, and the two years cannot start retroactively.
The lease, the licence or the contract cannot transfer
A location-dependent business with a short lease and no renewal option. A licence held in the owner's name that the buyer cannot obtain. A key customer contract with a change of control clause that lets the customer leave. A supplier agreement that is personal to the owner. In each case the buyer is being asked to pay for something they may not receive.
The fix is to negotiate now: a lease renewal with assignment rights, a licence structure that survives a change of owner, customer agreements that can be assigned or that run with the company, supplier terms in the company's name. Landlords and customers are easier to negotiate with when no sale is pending, which is another reason to do this early.
- Lease with a short remaining term or no assignment rights
- Licences, permits or certifications held personally by the owner
- Customer or supplier contracts with change of control or personal clauses
- Website, phone numbers, reviews and ad accounts in the owner's name
- Equipment or vehicles leased personally or encumbered
Concentration, decline and the balance sheet
One customer carrying a large share of revenue makes the business a bet on that relationship, and buyers and lenders price it that way. A revenue trend that has fallen for two years tells a buyer the next three will be worse, whatever the explanation. A balance sheet with old receivables, obsolete inventory, shareholder loans and personal assets mixed in says the business has not been run as a business.
Concentration is fixed by winning smaller customers and contracting the large one, which takes time. Decline is fixed by reversing it and showing at least a year of recovery. The balance sheet can be cleaned in months with your CPA. Each of these shows up in the valuation as a specific adjustment, so you can see what fixing it is worth.
The price
The defect owners least like to hear about and the only one that can be fixed overnight. A business priced above what its earnings and risk support will not sell, and the longer it sits, the more buyers assume something is wrong beyond the price. Owners arrive at the wrong price through rumour, through what they need rather than what the business is worth, and through counting the value of the fixes they have not yet made.
The fix is a valuation you believe, and a price set from it. If the number is lower than you need, the rest of this guide tells you what to work on and roughly how long it takes. If you want to know which defects your business has while there is still time to fix them, a BizSell.ca valuation costs $3,500 and names them. Call or text (604) 632-4959 or email ali@sedighi.ca.