What to Do When It’s Hard to Sell Your Business (Niche or Not)

There are many hurdles that can arrive when you are trying to sell your business – here are some tips to meet yours and your buyer’s needs.

Having a profitable business is no guarantee that you’ll one day be able to easily sell it. The pool of potential buyers for a business can vary widely depending on how unique your business’s products or services are and the specific profile of your business’s contracts, organization and ownership. Not only that, but wider conditions in the economy can affect the availability of capital in unexpected ways.

When a business has selective appeal in the market, a traditional “broad M&A auction process” isn’t necessarily a practical path to a successful sale. In my work as an investment banker for complex transactions, I instead often recommend to clients a highly customized process designed to reveal demand and pricing in a very thin market. That involves identifying prospective buyers or even a single ideal buyer, uncovering their motivations to do a deal and then making the business as appealing to them in as specific a way as possible.

This process is typically not a short one. It takes months at a minimum, and more advance planning than some might expect. But for sellers who finally connect with a buyer whose needs dovetail with theirs, it can be gratifying, not to mention financially rewarding, to go this route.

Here are some considerations for business owners to keep in mind when contemplating a potential sale of a niche business:

1. Finding the ideal buyer for the future of your business, not its past

The generic way of expressing the sale price of a business is to describe it as a multiple of that business’s earnings from the previous year. But this isn’t the way to calculate it. For buyers who only can see what a business has accomplished in the past, its value might seem quite low. But when a buyer has the imagination to envision the possibilities of your business combined with their business, the potential future earnings of that combination might be much higher.

Maybe your business has a locked-in supply contract that has helped you thrive over time, but could be much more valuable to the buyer — perhaps by leveraging this relationship into a new set of customers they previously weren’t able to access. This makes your business scarce and valuable to them, which is what every seller wants.

For any business, chances are there’s one potential buyer out in the world who is more fired up than anyone else. The seller’s job is to invest sufficient time and imagination brainstorming, perhaps in cooperation with an advisor, to figure out who that buyer might be. Understand the competitive landscape and consider any business that is adjacent to you, whether you’re looking upward toward customers, downward toward suppliers, or side-to-side toward competitors and complementors. Anybody who wins when you win, or loses when you win, could be a potential buyer.

2. Making your business seem scarce

Once you get a potential buyer fired up, you need to create some urgency for them — in other words, the opportunity to purchase your business can’t a forever option. Having other offers on the table is one way of accomplishing that, even if they’re not quite as enthused about the deal. Another way to drive the buyer’s interest is to be prepared not to do a deal at all.

If you feel you’ve found the one person who really wants to buy your business, it’s tempting to stop there and not explore any other options. However, doing that means that you have too little ability to walk away if the deal discussions don’t proceed as you hoped. In general, ignoring everybody else but your top prospect is unwise, since it leaves you without the ability to portray scarcity.

3. Pricing on the basis of sharing future benefits

It can be helpful to proactively quantify for the buyer what a potential business combination could look like. You want them to have a sense that by doing something together, you can beat the competition sooner or more effectively.

Whenever a company sells for a surprisingly high multiple of its previous earnings, the common denominator is that there’s something about the future, rather than the past, driving that value. Usually, the purchase makes something possible for the buyer that they couldn’t accomplish on their own.

Maybe combining the two companies makes some internal cost-cutting possible, or creates a new cross-selling opportunity. Sometimes, the purchase puts the buying company over a threshold to sell for a high value themselves. Whatever the reason, somebody has to run the numbers, understand the return on investment and be confident that there’s untapped potential. Taking the opportunity to guide this analysis will open new ways to talk about value.

To read the rest of the considerations for business owners to keep in mind when contemplating a potential sale of a niche business, click here.