You’ve likely seen the statistics on business sales: only about one in four small businesses listed for sale actually change hands. While that may be discouraging, it reinforces why we’re so committed to helping franchise owners successfully reach the finish line. It’s not the results we see.
Here are some of the reasons deals die before they close:
Lack of transparency on the part of the seller or buyer. When the franchisee isn’t clear about their motives for selling, buyers wonder whether they’re getting the full picture. If the business is so profitable, why would they want to sell it? What do they know that I don’t know? Sometimes, an owner will hesitate to disclose a decision or a mistake that makes them look less competent. When the full story comes to light, they’ll still be held accountable for the mistake, but now they’ll appear deceptive on top of it. We always advise sellers to be up front about every aspect of their business, positive or negative.
Unrealistic expectations. Business owners don’t always have a clear idea of what their business is worth. We dig deep into the financial data and help owners see sales and profitability trends they may have missed. Since what franchise buyers are actually paying for is cash flow, we can also make recommendations on how to improve it. We also encounter unrealistic expectations from buyers, and we try to manage them along the way.
Lack of responsiveness. We help sellers prepare as much as possible in advance for the diligence process, but there will be many requests for information and clarification in the months before closing. Business owners are busy people, and it can be hard for them to carve out time to work on the deal while running their business. But keeping communication flowing is the key to keeping the deal moving; delays cost sellers money and may cause them to lose interest in the opportunity altogether.
Franchise buyers are often looking at several opportunities at the same time, and if a seller isn’t moving the deal along, they may decide they’re not serious about selling. They move on to the next opportunity, because the window to bid on a profitable franchise unit closes quickly.
Landlord issues. Of all the stakeholders in the deal, landlords are the least motivated to close the deal quickly. Buyers, sellers, lenders and other professionals have a vested interest in a quick and clean closing. But the landlord already has a tenant in place who has been paying rent reliably. Nothing really changes for them but the name on the lease.
If the buyer is using an SBA-backed loan to purchase, the bank will require an option for a 10-year lease period. Some landlords may not want to be locked in for that long. We’ve also seen situations where the landlord decides that the proposed sale is an opportunity to find a new tenant, increase rent, or redevelop the property.
Time. We wrote about responsiveness above because time is the one sure way to kill a deal. If too much time elapses during the diligence process, lenders may request updated financial records, which could affect the company’s value. Personal issues and life changes may alter a buyer’s motivation or financial situation. We’ve even had a natural disaster change the landscape of the business – literally. The longer a deal drags on, the more likely it is that something will come up to prevent it from happening.
It’s also true that many owners, once they’ve decided to sell, tend to take their foot off the gas. They let business slow down or let inertia creep into their decision-making. That will decrease the business’s value and lower the final offer. The shorter the time between listing and closing, the better it is for both parties.
To learn what your business may be worth, click here.
