Attention, can I have your attention please? Business owners, please – your attention, please. Testing 1, 2, 3. Can you hear me? Hello, anybody out there listening? I have an important message to deliver. Please, can I have your attention?
Business owners: whether you can hear me or not, here’s my message:
Only 25% of small businesses ever sell! If you are like the “typical” business owner, you believe that 50-90% of your personal net worth is in the value of your business. But, 75% of you are not going to succeed in monetizing that portion of your net worth!
Now do I have your attention? Hello? Can you hear me? Please – acknowledge by screaming “Yes, I hear you.” (silence)
That’s my message, but nobody is listening – yet.
As I begin to blog, I find myself dreaming. In my previous blog post, I dreamt that President Obama would mention this problem – 75% of small businesses never sell – in his State of the Union Address and eliminate taxation of small business sales. It doesn’t seem like he intends to do that. But what if he changed the wording of his infamous “You didn’t build that” statement? He could say “You think your building value and equity in your business, but are you really? Only 25% of small businesses ever sell! Get some exit planning advice so you can monetize the sweat equity you have poured into your business. We need to save those jobs ….”
How can we reach small business owners with this message? Dreaming again – I’m a sports fan. I believe a lot of small business owners are sports fans. What if all MLB baseball stadium’s outfield fences had signs that read “Only 25% of small businesses ever sell!” What if the ribbon boards in NHL and NBA arenas around the country flashed three to four times a game: “Only 25% of small businesses ever sell!” How about a silent Super Bowl commercial – it only has words on the screen – “Only 25% of small businesses ever sell!”
Back to reality. How can we reach a large number of business owners with this message? More than a year ago, I did a little research using InfoUSA’s query engine. At the time, I was interested in the number of businesses (in certain SIC codes) with 3-49 employees (small businesses by my definition). That count (excluding some SIC codes that were not of interest) was almost 4,000,000 businesses. There were another 2,600,000 with 0-2 employees. How can we effectively reach those business owners with the message: “Only 25% of small businesses ever sell!”
I am soliciting suggestions. You can dream, as I have. Or you can offer suggestions within the realm of reality (such as LinkedIn Groups that might successfully reach business owners with this message.)
Let’s discuss it. Please comment below.
Filed under: 75% of businesses never sell, exit planning, sell a business, small business owners |
Jim Stauder's Business Exit Planning Blog 
Good post, I sent it to twitter, Google+ and LinkedIn. Can you help us understand where you got that stat? Is that 25% of all those businesses that choose to sell, or 25% of all businesses that are started, end up getting sold?
Paul,
Thanks for the actions you took and the comment/question.
Tom West is one of the gurus of the business brokerage world and the author of industry books including Business Reference Guide and The Complete Guide to Business Brokerage. He is also the co-editor of the Handbook Of Business Valuation and Mergers & Acquisitions Handbook of Small & Midsize Companies.
In his 15th edition of The Business Reference Guide, Tom West attempted to answer the question: What percentage of businesses are ultimately sold? Because business sales are private transactions, Tom acknowledges it is an impossible task, but he goes on to provide an educated guess.
Tom categorized companies into the following groups:
• Level One – Sales under $500,000 and fewer than 4 employees. Tom estimated that only 20% of these businesses will ultimately be sold.
• Level Two – Sales of $500,000 – $1,000,000 and 5 – 9 employees. Again, Tom estimated that only 20% of these businesses will ultimately be sold.
• Level Three – Sales of $1,000,000 – $2,500,000 and 10 – 19 employees. A little better, but not much. Tom estimated that only 25% of these businesses will ultimately be sold.
• Level Four – Sales of $2,500,000 – $10,00,000 and 20 – 100 employees. Better yet, but not great. Tom estimated that only 33% of these businesses will ultimately be sold.
Jim, I can buy the 25% of total businesses that are not sold. However, the vast majority of businesses are under $500,000 in revenue (what we call “lower main street” and the % of these businesses that don’t sell (they simply close their doors) is probably closer to 50%. This significantly skews the total %. If you remove “lower main street” from the equation, you would end up with a much higher % of businesses that sell (or are transferred to family or employees).
Jim, correction on my previous post. If only 25% of the total number of businesses actually sell and the vast majority of businesses are under $500,000 in revenue, then they will skew the total % down.
Tom,
I do not know if you noticed my response to Paul Cronin in the message immediately above your first comment. Take a look again. Tom West’s estimate of successful business sales is broken out by size. For those with 20-100 employees, he concluded that only 33% of businesses are successfully sold.
As a business broker, I targeted selling businesses valued above $1,000,000. But, in the offices I was associated with, I saw plenty of small main street businesses sold. Of course, I saw many more that didn’t sell. I was very surprised by many of the smaller businesses that actually did sell.
I firmly believe that most businesses could be sold, even very small businesses, if the business owners were aware of the obstacles they face and made a conscious effort to prepare their business for sale a few years in advance of their desired exit date. My experience tells me there is more buyer demand for “good” businesses than there are “good” businesses available for acquisition. However, there is an excess of “poor” businesses available for acquisition that will never sell. My contention is those “poor” businesses could be transformed into “good” businesses that would sell – if only the owners knew what they had to accomplish to have a saleable business.
As I wrote in my first blog posting a few days ago: My goal, as unrealistic as it may seem, is to turn around the odds of a successful business sale. At this point in time, the odds are about 3:1 against a successful sale. In conjunction with others (other authors, exit planners, business brokers, business valuators, CPAs, attorneys, personal financial planners, and other business advisors), I’d like to turn that statistic around to 3:1 in favor of a successful sale. That’s a very ambitious goal, but there is almost nowhere to go but up.
Tom, do you think those odds can be turned with sufficient owner education (over the long term – obviously). Or to put it another way, if a single individual owner understood the need to plan for the sale of his business, can the odds be turned for that individual owner to 3:1 in favor of a successful sale (from 3:1 against)?
Jim, at the base of the business pyramid there are a substantial number of businesses that have no value – they just provide a job for the owner. These businesses won’t sell because ther’s nothing to sell, and they’re counted in the universe of businesses, thus skewing the % of businesses not sold.
On the other hand, a business with $2M in revenue with some cash flow and some infrastructure WILL sell IF: the expectations of the owner are reasonable and there is demand for the company’s product or service.
I believe that ratio (3:1 against) can be improved, possibly even turned around, but we have to keep in mind that the ratio will be skewed by those businesses that just provide a job and have no value. We (all the people you mentioned above) need to educate and motivate the business owners with a sellable business to take the time to plan for an exit, implement the proper value drivers, and position their company to make them more attractive to prospective buyers.
This is truly one of my biggest conundrums, and I have yet to determine how to change these percentages in my market. I disagree that very small businesses are also unsaleable, however, they may not be saleable at a price that reasonably warrants a brokers participation.
Even companies that are effectively a job for the owner, and that goes up to quite large businesses in some cases, have a value beyond the owner whether that be client lists, service contracts, that service in that location, etc. It is a fundamental lack of financial literacy that often stops these businesses from selling, resulting in skewed perception of value – in both directions.
We are continuing to try different methods to build some traction with these business owners, but, so far it is much more effort than the outcomes support. We have but time available to us, and the fact that larger businesses more easily recognize our value, and have the financial information to support their sale in usable form, it is hard to justify significant time on the education that is needed.