Declining Businesses And Poor Financial Records Make It Tough To Sell A Company

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Growing businesses will always be more attractive to buy than businesses in decline. Bar none. This is not to say that a declining business cannot be sold, but the likelihood of closing correlates directly 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 one that is stable. Many times, based on the lower price, buyers will show initial interest but will end up backing out of the transaction prior to closing as the overall weakness of the business becomes more apparent during due diligence and scares them off. Finally, it’s harder to obtain financing for declining businesses, so even if you clear all other hurdles you are still at the mercy of a lender who is likely to be risk averse.

Financial performance drives valuations, and poor financial records can derail a deal in numerous ways. A buyer may only look at general financial data prior to making an offer, but during due diligence they may dig deeper. If the scarcity or complete 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, and therefore there are not any disputes over cash flow and net income. The harder a buyer has 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 pale in comparison to the financial gains you receive when you sell.

Peter Holton is the Managing Director for Caber Hill Advisors and has been in the service industry for nearly 20 years and is well known and respected throughout facility maintenance industry. He manages the firm's practice facility maintenance sectors. Peter offers valuations, exit planning, consulting and buying or selling business. He has performed numerous speaking engagements for organizations such as ISSA and BSCAI. He can be reached at peter@caberhill.com or by visiting www.caberhill.com.