Six Reasons a Buyer Says "NO"
Buying a business is rarely an impulse or “on the spot” decision. It is a process that can make most buyers nervous at the very least, with many seemingly small things derailing the sale process.
During the next 3-5 years it is estimated that over 20% of small businesses will change hands, and over 50% of business owners plan to use their business as a primary source of retirement funds. This means there will be a lot of competition for buyers to “shop around” and many businesses will not sell for what they are really worth.
Given this competition, it pays to be prepared and understand what makes a buyer say “NO” to your business.
The prime cause for a buyer to say “NO” is fear – the uncertainty about getting it wrong. It is not always about price, it can be about key staff, understanding the business or industry trends. The buyer wants to make sure that future performance will be predictable.
What makes a buyer nervous is the possibility of unpleasant surprises further down the track. Often the question a buyer asks is not “how much will I pay?” but “what is likely to go wrong?”
So what things can go wrong and what things generate fear in a buyer? What Makes A Buyer Say “NO”?
Some of the key reasons that make the buyer say ”no thanks” include:
1. Uncertainty in the industry
2. Changes in regulation
3. Uncertainty in future profitability or cash flows
4. Excessive debt within the business
5. Complex operations or business systems
6. High dependence on owners / staff
The first three reasons relate to the fear of not making sufficient earnings in the future, whilst the other three reasons are more concerned with fear of the business not functioning correctly.
Uncertainty in the industry or potential changes in regulation make people nervous about future performance potential. Whilst this can impact the price that is ultimately paid, it is also the fear of markets disappearing. When import tariffs were dropped in the early 80’s, many industries were radically altered because their markets disappeared. Changes in regulations also have a big impact on the confidence of investors to achieve a long term return.
If the company structure is being sold with the business, then all debts and liabilities are then transferred to the new owners. Excessive debt becomes a problem if the new owner is not confident that future earnings will sufficiently cover the loan repayments.
Complexity of the business is always a killer for a buyer – if they can’t understand it they will not feel confident in paying the price you want.
However a frequent reason a potential buyer says “no” to a business is if the performance relies too heavily on owners or staff. Over-reliance on key staff generates fear that the business will not perform as well without them. In this case it is vital to show how the skills and knowledge can be transferred and how stable and secure the workforce is.
Most buyers of a business will have ideas on how to increase sales or reduce costs, but it is uncertainty that will always make a buyer think twice. The seller of the business must have a plan ready to address these issues and make the buyer feel comfortable and confident that performance will improve under their ownership.