UK entrepreneur, Graeme Carling discusses why businesses don’t sell. It is reported that over 90% of the businesses listed for sale will not ever sell and will eventually end up being closed down. Serial entrepreneur and Managing Director of United Capital, an investment organisation that is consolidating the fragmented UK building services and facilities management sector, offers his expert business insights into what goes wrong and how business owners looking to sell can improve their chances.
Why Businesses Don’t Sell
The most common issue faced when acquiring businesses is the seller’s unrealistic expectation of the value of the company. This is usually from broker’s touting for business and offering free valuations, basing the figures on face value.
Brokers will take the information provided by seller, and it is their job to make the company look as good as possible to buyers. However, after a buyer applies due diligence, scratches under the surface and takes into consideration EBITDA – the most commonly known way of valuing a business – there becomes a considerable difference in the broker’s valuation and the market valuation.
The broker’s valuation provides an unrealistic expectation of the business’ value and as a result, 90% of businesses won’t sell.
How Should Businesses be Valued?
As a buyer, it’s important to find out the exact cost of running the company before valuing the business. For example, the owner and directors of a business are most likely to take their wage from dividends as opposed to a salary as this is the most tax efficient choice for the business and director. However, it is very unlikely that a broker will be looking at this level of details. Say there are three directors at £100k, that would be £300k less in value for the business.
What is the Broker’s Role?
The broker is there to get the seller as much money as they possibly can. They’re there to “beef up the hog”. Whether that’s telling sellers to reduce expenses where they can, drive revenue to create a greater EBITDA (earnings before interest, tax, depreciation and amortization) total.
Any credible buyer will be able to see through this with the process of due diligence and will get to the bottom of the figures by taking a more holistic approach at the business’ performance by potentially going back years.
A broker won’t explain that payments for buying a business are typically staggered, possibly with performance reviews and other indicators being reached before the next payment. It’s unlikely that any buyer would provide all of the money upfront as this would leave themselves with the full risk.
Importance of Advisors
Anyone who is looking to sell their business, make sure you appoint experienced legal and accounting advisors. You might have ones that you use for everyday business needs, but when it comes to selling you want advisors who have a wealth of experience in the buying and selling business.
At United Capital we prefer to deal with sellers directly than through brokers. The reason for this is we find that more motivated sellers are looking to speak directly and are invested in the company, whereas the brokers are working on behalf of the seller.
We deal with motivated sellers, where we can identify a strong management team, proven track record of financial growth. Strong businesses that can prove they’ve been successful in their industry. Be honest and clear.