Why most small businesses don’t sell

First off, let’s define small...

According to gov.uk, a small business is one that has turnover or a balance sheet total of less than or equal to €10m, or less than 50 staff. A micro business is one with less than or equal to €2m turnover or a balance sheet total and less than 10 staff.

I have no idea why the currency used on the UK Government website is in Euros but it roughly equals £8.5m for small businesses and £1.7m for micro businesses. Personally, I think a business doing over £1.5m of revenue with 9 staff deserves to be called something a bit nicer than micro, but I am not sure it is worth writing to my MP about.

Next on the agenda, do small (and micro) businesses really not sell?

There are various stats out there on Google and I have used ones quoted from the Exit Planning Institute and BizBuySell that estimate that between 20 and 30% of businesses listed for sale fail to sell. Find out more by clicking here

I can also corroborate this in my own totally unscientific way. In the last four years I have had contact with 132 businesses (sadly, I did just count the number of folders in my inbox) where the owner has expressed an interest in selling and in truth, less than a handful were viable acquisition targets.

So why don’t they sell?

I believe there are five key elements for a business to be a viable acquisition target. If the business can’t demonstrate these then the risk to the buyer is higher, and the business less likely to sell. These elements are:

  • Limited, or zero, reliance upon the owner. If the business owner is in the business day to day and critical to the business’ operations, then you must question how the business will perform or even survive without them.
  • Quality second tier management. This reduces the risk to the business once the owner leaves and reduces the business’ reliance upon one member of the management team.
  • Documented systems and processes. Even better if these are automated. I have heard horror stories of multi-million turnover businesses being run on bits of paper that get passed around the office and only the owner knows what on earth is going on.
  • Quality financial reporting. This means cash flow forecasts, management accounts, KPI dashboards, etc.
  • Regular, repeatable profits. Covid years can confuse things at the moment but when buying a business, buyers are actually buying future cash flows and the more predictable they are, the less risky the acquisition is, and the more likely a business is to sell.

Have all my acquisitions demonstrated these five elements?

Truthfully no, and I have had to learn some hard lessons along the way. I have had to recruit management in on a couple of acquisitions and have been lucky and unlucky with who I have appointed. I have had to introduce financial reporting systems and marketing processes which have mostly worked, and I have had to manage sellers out of the business with both positive and negative consequences.

Do my acquisition targets have to demonstrate these five elements?

The reality is that most small business do not demonstrate all of these elements. However, this is where I can help owners of these business to achieve an exit. Why? Because I have been there and done it and if there was a T-Shirt available for it, then I would have got it! Here are a few examples of the things that I have done to enable a potentially unsellable business to be sold:

  • Recruited first and second tier management to work alongside the seller during a handover period. This has enabled the seller to exit and for the business to continue performing at its previous levels.
  • Introduced financial reporting systems.
  • Introduced sales and marketing plans.
  • Produced integrated cash flow, P&L and balance sheet forecasts (I do like a bit of Excel!).
  • Taken action to turn cash burners into cash generators.
  • Structured deals around getting the sellers a good cash exit whilst not exposing myself, the seller or the business to undue financial risks.

I am thinking about selling my business, can you help me?

Of course. Send me a message via LinkedIn. My current group are all manufacturing businesses in the North of England but given my broad background I will look at most sectors or will know someone in my network with the right experience.

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