Why A Potential Buyer Won’t Buy Your Business, Part 1 of 3

by | Apr 27, 2021

I often think in terms of the seller because my ideal clients are established, Las Vegas business owners considering the sale of their business.

In this series of posts, I’m taking a bit of a shift, thinking from the buyer’s perspective… There are several reasons why buyers won’t want to buy your business. And there are several things that buyers should consider during an evaluation of a potential acquisition.

If you remember just one thing from this series about the buyer’s point of view, it would be they won’t buy your business because there is too much RISK.

Potential buyers are different from founders. When you think about selling your business, you immediately go to revenue/profits. If you watch the television show “SharkTank,” you’ll hear questions about revenue all the time. “What’s your revenue? What are your margins? How much money have you made?”

While these are important, they are not an astute buyer’s only focus. There are plenty of other factors buyers consider when looking to buy a business, and revenue is definitely high on the list, but you can’t think that’s all they care about.

You started your business because you love the work you are doing. But it is likely that you created a JOB for yourself. I see many entrepreneurs who are SELF-EMPLOYED, rather than really being business owners.

A buyer is coming in because they are an INVESTOR — they are not looking for a job, they are looking for a RETURN. An investor wants to minimize their risk and maximize their return. Greater risk and reduced return results in a lower investment for riskier ventures.

You’ve probably created an unrealistic valuation in your mind — all business owners do it. You built this business from the ground up and put in all your own blood, sweat and tears, so you think your business is more valuable than it really is. For you, it’s emotional, for a buyer, it’s an investment — all about the dollars and cents (it’s just business).

For example, if it’s cheaper and easier for an investor to become your competition—build a business of their own to compete with you — they’ll do that because it’s a better investment of their money. They’re most likely not driven by the satisfaction of doing something they enjoy or supporting the local community.

So, what are some of the risks that a potential buyer sees when they look at your business? There are 8 common risks that often show up on a buyer’s radar; we’ll look at the first three in this post and then go over the others in the next couple of blogs.

Risk #1: Your business is too reliant on you – you are the hub of business operations.

You’re not only the founder, you “OWN” the business.

You own the relationships with customers, employees, vendors. You own the decisions. You own the successes and failures. In short, you take ownership of all aspects of the business, and it relies on you to be the hub of operations.

How many times have we all heard that the answer to a problem is to “take ownership of it”? Well, you’ve taken that to the highest degree in every aspect of your business. This approach reinforces my earlier comment that you are self-employed, you’ve created a job for yourself, and that’s not a bad thing—but it is a reason why you won’t be able to sell your business, why someone won’t buy your business.

Here are a couple of tools that might help you see this concept better and create a plan to minimize how much your business relies on you.

Risk #2: Your books are in disarray.

When there is interest in your business, one of the early steps a buyer will complete is a due diligence exercise — I think about it like a prostate exam for your business because “they’ll get all-up-in-your-business.”

They’ll review your books to see if the numbers you’ve been advertising are accurate and defendable. If your accounting is a mess, that’s a risk that’ll scare a potential buyer. I recommend working with an accountant or CPA to get your financials in order and having an external audit done to ensure your financials are defendable– whatever the numbers might be.

This is a great recommendation whether you’re thinking about selling your business now or sometime in the future (or even if you never sell the business). Regular checkups (again, like a prostate exam) are always a smart idea for a business owner.

Risk #3: A lack of monopoly control.

This risk relates to what I mentioned earlier in this post, which was about a potential buyer becoming your competitor instead. If what you do/what you sell has become a commodity, it’s likely it could be easier and cheaper for an investor to become your competition if you’re not unique.

Put another way, if you don’t have “MONOPOLY CONTROL” in your industry/region, an investor will just copy what you do and become your competition. If they can do it better, easier, and cheaper than buying your business, they’ll build their own and you’ll find yourself in a race to the bottom.

Eventually you won’t be able to sell your business, no matter how valuable it is, and they may force your exit plan to be an asset liquidation sale—and this is no good for creating generational wealth or building a community legacy. Warren Buffet, who buys companies every day and has for decades, says, *“What we’re trying to find is a business that, for one reason or another, has this moat around it.” Meaning a business with a competitive advantage that allows it to maintain pricing power and better than average profit margins.

So, you want to think about how you might create a “monopoly” in your area.

Next time, we’ll pick up with Risks #4 & #5… the lack of growth potential and too much dependency on other people.

*Source: https://finance.yahoo.com/news/warren-buffett-explains-moat-principle-164442359.html