Business failure: Here are three reasons why companies fail to sell and what you can do to prevent them
Although rarely spoken about, the fact is that successfully selling a business requires considerable expertise and experience. Businesses are both unique and complex and there is a myriad of reasons why they may not sell. More often than not, they fail to sell – with Forbes estimating a failure rate of 90%.
With over 26 years of experience, the main reasons for business sale failures are well known to us and are evident from our initial meetings with each business owner we meet but, in this insight, we look at 3 of the most common reasons companies to fail to sell and provide expert commentary from our own experts on what can be done to avoid or mitigate these issues.
1. Over reliance on the business owner
Some businesses have been built around the name, the character and the contacts of the business owner over many years, often this can be decades. The success of such businesses is built and focused as much on these factors as any other and so the business owners themselves constitute a large and integral part of the business.
Thus a significant and fundamental element of the business goes when a business owner departs. Contacts are lost, relationships are lost or fade and, for some businesses named after the owner, this means the loss of the company’s figurehead – the person ‘who is the business’.
For many buyers this is an issue which not only generates risk but also one which is impossible to rectify in the short to medium term. Even if the business can successfully recover from the loss of the company’s figurehead, it may have suffered a great deal of financial damage in the process.
However, this is a far from unusual situation and solutions are available, as Sally Hardman, Principal Consultant at Avondale advises “In an ideal scenario any business is future proofed with a sustainable management team in place, and not just one person leading the business. In particular, with a sale on the horizon, the shareholders should be considering the future leadership team and their ongoing commitment to the business. However, if, as a business owner you are still integral to the company, the right sale terms and buyer can address this.”
2. Dependency on 2-3 high value clients
Large, high value clients do, of course, add great value and credibility to a business and provide an attractive element to potential buyers. However, for some businesses, reliance on the revenues generated by a small number of such clients, typically 2-3, can place the business in a precarious and risky position. The loss of just a single one of these can hit revenues hard and potentially push the business into a break even or loss-making situation, leading to a potential business failure.
With risk being a significant factor in attracting and securing buyers it is easy to see how over reliance on 2-3 larger clients can dissuade buyers from making an offer.
Simon Baldwin, Principal Consultant at Avondale advises “Whilst this does not mean the business is unsaleable, it will deter many buyers. The solution is, of course, to seek new clients to reduce the dependency. However if this is not practical, then seek terms or contracts with the existing clients that demonstrate the commitment and likely longevity of future business. The terms/contracts should also be transferal to an acquirer”.
3. Lack of repeat business or recurring revenue
Recurring revenue is a significant risk-reducing element of a business, particularly if spread across multiple customers or clients. And reducing risk for potential buyers is not only important for evading business failure, but it is also a key element of any successful business sale.
A secure revenue stream for any new business owner, be it from long term contracts or simply long-term repeat purchases from customers provides a strong degree of financial security for the business.
However, for many businesses, this model of recurring revenue is not so accessible, so what can such a business do to mitigate this?
Sunita Meigh, Principal Consultant at Avondale advises “In such circumstances, positioning of the business is critical. The ability and experience of the advising consultant to diminish the risks and capitalise on the future opportunities for business growth is critical to a successful business sale and helps to overcome the lack of recurring revenue/repeat custom.”
These are three of the most common reasons why businesses fail to sell however, as we said at the beginning, they are not the only ones.
Successful business sale professionals understand the pitfalls and how to position a business to overcome potential objections and/or help business owners address and mitigate these potential risks within a business. A business sale should ideally be approached when it is the right time for the business to be sold and not the right time for the seller.
If you are considering selling your company, talk to one of our experienced Principal Consultants who can not only identify any potential issues you may have which could prevent a successful sale, but also advise you on the saleability of your business and provide an experienced and in-depth analysis of the potential success of your business.
If you would like more advice on selling your business or simply avoiding a business failure, take the first step today by contacting us here for a confidential conversation with one of our expert advisors.