Did you know that only one in five businesses listed for sale actually sells, according to mergers and acquisitions (M&A) experts? As a business owner, if you can understand why certain companies don’t sell then you can position yourself to avoid the common mistakes so many owners make, and become one of the 20 percent who succeed when selling their business.

A Pepperdine Private Capital Markets Project report from 2013 lists five common reasons companies don’t sell and are taken off the market (“percent” indicates percentage of survey respondents who gave this answer):

1. Seller’s unrealistic expectations (33 percent);

2. Lack of buyer preparation (15 percent);

3. Poor seller preparation (11 percent);

4. Unreasonable nonfinancial demands (9 percent); and

5. Personality conflicts (9 percent).

The study also surveyed M&A professionals about the biggest mistakes made by sellers that hurt their chance of completing a deal. The top three answers were:

1. Unrealistic expectations (50 percent);

2. Declining business sales (16 percent); and

3. Poor financial records (15 percent).

As the two lists suggest, the seller has control over the majority of the items that can cause a deal to fail. Let’s examine a few in depth.

Expectations, demands and preparation

Transactions require agreement on a broad number of items, including price, deal and legal terms and a general sense of trust that each side develops in the other. An owner who has unrealistic expectations of the acceptable price and terms or who makes unreasonable demands during the negotiation will find it difficult to reach agreement with a buyer.

It should be obvious why unrealistic pricing expectations can kill deals, yet this prevails as the most common offense. Unfortunately, many owners enter the business sale process without an accurate understanding of their company’s fair market value. But it doesn’t end with price, as disagreements over deal terms can be as equally detrimental to your success. To succeed, you need to understand the customary terms that apply to companies within the landscaping industry. Terms will depend on the size of the business, location and customer concentration.

Why do so many owners make these mistakes? It’s lack of preparation. Most don’t want to pay for a professional valuation and many would rather try to sell the company on their own than hire a business broker. The “fortunate” among this group end up selling, but it takes two to three years, rather than the customary six to nine months, and many of them accept a price that’s below fair market value. To succeed (close a transaction at fair market value in a reasonable period of time), owners must be cognizant of these critical items.

Declining business sales

Growing businesses always will be more attractive than businesses in decline. This is not to say that you can’t sell a declining business, but the likelihood of closing correlates with the sales trends. Buyers may price the decline into their valuation; however, if the decline continues or accelerates during the period between acceptance of an offer and closing, many will walk away.

Fair market value for a declining business is obviously less than it is for a stable company. Many times, based on the lower price, buyers will show initial interest but will back out of the transaction before closing as the weakness of the business becomes more apparent during due diligence. Finally, it’s harder to obtain financing for declining businesses, so even if you clear all other hurdles you’re still at the mercy of a lender who is likely to be risk averse.

Poor financial records

Financial performance drives valuations, and poor financial records can derail a deal in many ways. Buyers may look only at general financial data prior to making an offer, but during due diligence they may dig deeper. If the scarcity or absence of financial records complicates or prolongs their due diligence, they may use it as an excuse to pull out of the deal.

Companies with clean financial records are easier to sell because the owners do not run many personal expenses through the business. Therefore, there are not any disputes over cash flow and net income. The harder buyers have to work to understand and verify “add backs,” the more skeptical they become. This skepticism can lead them to rethink the purchase price and, in the most extreme cases, can cause them to call off the deal.

Poor financial records create the perception of a risky transaction. Risk has an inverse relationship with both valuation and closing success rates. Buyers pay less for riskier acquisitions, if they decide to purchase at all. The expenses associated with cleaning up your financials are minor compared to the financial gains you receive when you sell.

Finding a win/win

Successful transactions result in a win/win situation. A seller receives a good price for the business and is allowed to transition out, while a buyer makes a confident investment and is excited about the future. To accomplish this feat, owners need to be cognizant of their companies’ fair market values and the general standards for acquisitions in their industry.

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