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Why You Won't Sell Your Business

3. False intentions (the owner's). Another small-business classic: the owner who does not really want to sell.

Maybe that owner just put the business up for sale to test the market, so he or she could sleep better at night knowing that the business is worth a half million dollars. Maybe family members or a spouse put him or her up to it, and when the business does not sell for the asking price, the owner can go back and say, "See, I tried, but there is no one willing to buy." Maybe the owner realized he or she could make more money by keeping the business than by selling it. For example, the San Francisco restaurant/pub is generating about $200,000 in cash flow a year and, according to the insider's formula, is worth $650,000. The seller can earn that price back in three years, and everything after that is gravy.

Moreover, since most buyers pay only a portion of the purchase price in cash, the seller may get less cash by selling than by keeping the company. That is especially true because the deferred purchase price is typically dependent on the success of the business in the hands of the buyer, and the seller may feel more confident of keeping the business profitable as long as he or she is the boss.

Thus, the first question every buyer should ask: why is the owner selling the business?

4. The fickleness of fashion. For most midsize to large businesses, valuation is based on financing fundamentals: How much cash does the business generate? How steady and reliable is that cash flow? And what is the upside potential for increasing market share, revenues, and profits? For small businesses, emotional and other noneconomic factors often come into play.

Those make valuation quite uncertain and much more dependent on the fashions of the times. There are always the trophy businesses, such as the minor-league baseball franchise and the Napa Valley winery. But generally, emotion, fashion, and personality make a mess of the valuation process. And that can scotch deals. What's important to understand is that fashion is subjective, and no two buyers and sellers are likely to judge it -- or the price attached to it -- the same way.

5. Personal problems. The need for fulfilling personal objectives, such as finding a romantic retirement business in rural New England, continues to motivate transactions in the small to midsize business marketplace.

Like the trophy businesses, such enterprises are not priced on a financial basis. (See, for example, the New Hampshire country store.) However, they do provide the prospective owner with a perceived lifestyle different from the frenzy of a job in the city and typically also include free room and board, as well as status in the community, as part of the benefits. (See the Vermont country inn, for example.) Since no bank or other financing source will accept such noneconomic justifications, those businesses must generally be bought for cash. Even seller financing does not work if there is not enough cash flow to pay the interest and principal on the debt. In the 1980s partial financing was available from local banks that lent on the basis of real-estate values, but that source of financing is no longer available. Thus, noneconomic deals don't sell unless they are trophy businesses available to the truly rich (that is, cash-rich) buyer.

6. Too few had double appeal. The Maine model-ship maker that sold had a combination of strong financial appeal and, for the eventual buyer, personal-satisfaction appeal. And that combination came at a relatively low price -- especially when compared with the Vermont inn, in which case low cash flow had to support a high (and real-estate-driven) purchase price. For the model maker -- as for many businesses of this size -- the combination worked.

7. Technicalities. Even for small to midsize businesses, the need for proper structuring -- using qualified legal and accounting help -- is critical. The owner of the Rocky Mountain outdoor-goods discounter got the price he was asking for but was unable to sell because he failed to create a legal structure for the business that was acceptable to the buyers. Proper planning, either when the business is organized or at least a few years before the sale, could have significantly increased the value to the owner.

8. Confidentiality (an aside). The need for confidentiality is an often-voiced concern of sellers. While a confidentiality agreement signed by every prospective buyer provides legal protection, sellers must expect that their decision to put the business on the auction block will eventually leak out. Accordingly, they must prepare for a leak and take all necessary steps in advance to minimize its impact. If the stage is properly set, news of the impending sale of a business need not destroy employee, vendor, or customer relations. Sometimes the only person who is upset about the leak is the owner, because he or she really was not ready to sell.

9. Maturity doesn't sell. Few of the businesses for sale had substantial growth potential. Most were mature businesses in a limited marketplace. Accordingly, they were priced relatively low and were of limited interest to entrepreneurial buyers who were looking to acquire a business so they could launch it on a new phase of growth.

-- Susan Pravda