6 Tips for Business Owners On How To Sell a Declining Business

When it comes to selling a business, it is almost always best to sell when your business flying high and enjoying a period of strong growth. However, this isn’t always possible. If you do need to exit in less than optimal conditions, the way you approach the sale has a large impact on whether or not you succeed. To give yourself your best shot, it is important to first understand best practices for selling a declining business.

In this article, we begin by discussing how business value is calculated and why selling a declining business can be challenging. We then move on to six tips to help you sell a business with negative trends. These include:

• Choose your exit timing wisely
• Adjust your expectations
• Be transparent
• Price your business realistically
• Be flexible with deal terms
• Work with a business Advisor

Related Article: Timing Your Exit: How to Determine When Is the Right Time to Sell Your SaaS Business

How Business Value is Calculated

First, it is important to understand how business value is calculated in order to have a deeper understanding of the challenges that a declining business presents to a seller.

The SDE multiple method

Among all the business valuation methods, the SDE is the one most commonly used. According to the SDE multiple method, business value is equal to the seller’s discretionary earnings (SDE) times the multiple.

Business value = SDE x the multiple.

Simple on the surface, a lot lies behind both the SDE and the multiple. The SDE is essentially the total benefit that the business provides to the owner. To calculate SDE, start with business income and add back all allowable discretionary expenses or income.

While that doesn’t sound too complex, it requires you to know which expenses count as discretionary and which are not counted as discretionary. In general, discretionary expenses include:

• Interest
• Taxes
• Depreciation
• Amortization
• Owner’s salary
• One-time expenses (business travel, etc)

While not a complete list, these expenses are a great place to start.

“Your growth patterns influence the purchase price you are likely to get when selling your business.”

Breaking down the multiple

Two businesses can have the same SDE, but be valued quite differently. This is pretty easy to see even without getting super technical. Do you think prospective buyers would prefer to buy a business with $100,000 SDE that is growing rapidly and steadily, or a business with $100,000 SDE that has been in steady decline for several years? The answer is pretty clear.

The multiple takes into account tangible and intangible aspects of the value of a business. This could include the stability of the marketing strategy, company patents, pending lawsuits, the quality of business financial records, and much more.

In general, these tangible and intangible aspects can be grouped into four categories called the Four Pillars of Value. They are:

• Growth
• Risk
• Documentation
• Transferability

We’ll get to growth in a second. All other things being equal, potential buyers are willing to pay more for a business that has less risk than others. They also prefer businesses that have up-to-date and orderly documentation, including financial records, standard operating procedures, legal documentation, and more. Lastly, your business must be able to be transferred to new ownership in order to attract buyers.

The importance of growth or decline in determining business value

Past, present, and potential future growth plays a significant role in determining the level of interest you receive for your business. Through that, your growth patterns influence the purchase price you are likely to get when selling your business.

Why? To help answer that question, it is helpful to recognize that most potential buyers are looking to receive a high return on their investment when making a purchasing decision. When buying a business, it can be challenging to really know what you are going to get or how the deal is going to pan out in the long run.

The best way to get a high return on investment when buying a business is to buy one that you expect will grow into the future. As with people, past behavior (i.e. growth patterns) is often a good predictor of future behavior.

For this reason, buyers are more attracted to businesses that have strong past and current growth records. The more attractive a business is, the more competition it will get, driving up the value. As you can imagine, the opposite is also true.

The Downsides of Selling a Declining Business

If you are thinking of selling your business while it is in decline, it is important to know the impact it could have on your exit. In general, a declining business can lead to:

• Fewer interested buyers
• A lower sale price
• Less attractive deal terms

Fewer interested buyers

For starters, a declining business will most likely attract fewer interested buyers. This can reduce competition for your business, increase the length of time it takes to sell your business, and lead to a more challenging selling experience.

“For starters, a declining business will most likely attract fewer interested buyers.”

A lower sale price

Less competition can translate to a lower sale price. With fewer offers on the table, prospective buyers will have less incentive to make competitive offers or renegotiate offers once they have been made. However, it is important to keep in mind that there is generally a price at which any business will sell.

Less attractive deal terms

The final sale price is not the only metric to measure the success of a sale. The specific deal terms you receive have a huge impact on your post-sale life. With less competition for your business, you have less power when negotiating favorable deal terms.

Despite these challenges, it is important to know that you CAN still successfully sell a declining business, as long as you take the right approach. By implementing certain steps, you can often increase the final sale price and create an easier selling process.

6 Tips to Achieve a Successful Sale

If your business is in decline and you are thinking about selling it, there are several things that you can do to improve the outcome. These include:

• Choose your exit timing wisely
• Adjust your expectations
• Be transparent
• Price your business realistically
• Be flexible with deal terms
• Work with a business Advisor

1. Choose Your Exit Timing Wisely

Before moving forward with selling a declining business, first stop to consider whether or not now is the right time to sell. Of course, you may feel that you don’t have much choice in the matter. For example, you may need some liquidity to pay down debts, come up with a down payment on a family home, pay off unexpected bills, or more. In these scenarios, selling your business may be your only real option.

If you can wait, wait

If you do have some flexibility as to when you sell your business, you may want to strongly consider waiting. If you can delay your sale by 12 or 24 months, it gives you more time to turn things around to increase its fair market value before listing it.

Let’s say your business has had declining revenue and income for several years, with a current SDE of $50,000 and falling. After getting a valuation, you realize you could only realistically list it for $75,000, implying a 1.5x multiple.

You decide to work on the business for two years and sell it once things are in better shape. With some strategic thinking and hard work, at the end of the two years, you raise the SDE to $150,000. Your SDE is higher, and your business is growing.

“If you do have some flexibility as to when you sell your business, you may want to strongly consider waiting.”

Your business is now valued at $450,000, implying a 3x multiple, which is primarily explained by the fact that your business is growing rapidly as opposed to being in decline. In two years, you have tripled your SDE, doubled your multiple, and increased the value of your business by a factor of six!

Instead of walking away with (hopefully) $75,000, you walk away with $450,000 minus closing costs, an increase of $375,00. If you can wait to sell a declining business, wait. Delay your exit, work on your business, and sell it for more money down the road.

There may be scenarios where you aren’t forced to sell your business, but holding on to it would be challenging. For example, perhaps you are truly burnt out on running it, and it’s taking a heavy toll on your personal life. Only you can make the decision as to when to sell your business.

2. Adjust Your Expectations

If you do decide to sell your business while it is in decline, it is important to be realistic about what the process will look like and how much you are likely to receive for it. Many owners are understandably attached to their business and view it through rose-colored glasses. They may see its special characteristics, or focus on “What it could be like” in the future with just a little bit of work.

While optimism is an important quality for an entrepreneur, having unrealistic expectations is harmful when selling your business. If you go in expecting to get more than is realistic, you may drive away potential buyers and fail to sell your business entirely.

While it can be hard to do, untangle your emotions from your business and look at it how a potential buyer would. See its strengths as weaknesses, and start setting realistic expectations for yourself.

“While optimism is an important quality for an entrepreneur, having unrealistic expectations is harmful when selling your business.”

3. Be Transparent

When selling a declining business, some sellers may feel tempted to try to minimize or omit unflattering details. The hope is that buyers won’t notice, and will perceive your business more favorably than it really is. However, there are several reasons why you shouldn’t do this.

Be upfront about shortcomings

For starters, it’s just the wrong thing to do, plain and simple. A kindergartner could tell you as much, but it often is worth repeating. Being dishonest in business and life is a great way to fail. Be transparent and open from the beginning about your business’s strengths and weaknesses. Lay your cards on the table, and don’t try to sugarcoat anything when dealing with interested buyers.

Many small business owners are tempted into thinking that they can successfully hide negative attributes from a buyer. However, this is rarely ever the case. If a buyer makes an offer, they still have time to thoroughly examine your business during the due diligence process. Often, buyers will hire due diligence professionals to help them navigate this process.

In all likelihood, they will discover everything about your business during due diligence. When they become aware that you have hidden aspects of your business, it will destroy trust and sour the relationship. More often than not, the buyer will pull out of the deal altogether.

By being upfront from the beginning, you control how and when you communicate your business’s challenges. If a buyer is deterred by a declining business, at least you know right away, as opposed to weeks down the road. Regardless, transparency and honesty build trust and rapport, two key ingredients for a successful exit process.

Know the reasons behind your business’s performance

As a business owner, it is also highly important to know the reasons why your business is declining as well. When you tell a buyer that your business is declining, be prepared to also give them a clear explanation as to why it is happening. Being able to explain the reasons behind the decline helps them visualize how they can turn things around in the future.

For example, perhaps your business is declining because you have encountered unique supply chain disruptions. With several products out of stock, sales have taken a hit. While this is clearly still a problem, they may be able to address the issue by finding new suppliers or reconfiguring their supply chain.

Have a plan to address challenges

Once you share the reasons why your business is declining, have a clear plan as to how the issues can be addressed. While a plan for the future is no substitute for current performance, it can help to assuage buyer fears and give them confidence about future prospects if they buy the business.

For example, perhaps your business’s poor financial performance comes from a decline in the performance of your paid advertising campaigns. If this is the case, examine why your paid advertising campaigns are performing poorly, and develop a plan to turn things around. This could include making changes to your paid advertising strategy, implementing new marketing and sales strategies, and more.

4. Price Your Business Realistically

Many online business owners are tempted to price their business higher than it is truly worth. This is especially true when selling a business that is in decline. However, setting an ambitious price for your business does not mean that you are going to achieve that price. In fact, it can often work against you.

A high asking price drives away potential buyers who might otherwise be interested in your business. In this case, your business may sit on the market for a long time, further decreasing its value.

Fight the temptation to price your business too high. Instead, set a realistic price based on the facts of your business. By doing so, you give yourself the best shot at bringing growth-minded buyers to the table and attracting multiple offers. Multiple offers can often translate into a higher final sale price once all is said and done.

“A high asking price drives away potential buyers who might otherwise be interested in your business.”

5. Be Flexible With Deal Terms

The deal terms that you negotiate with the buyer have a significant impact on the overall success of the sale, and thus on your post-exit life. Most buyers prefer to receive one single payout at the time of closing for the full amount. However, this is not always possible when you are selling a business that is in decline.

To increase your chances of success, it is helpful to be willing to be flexible with possible deal terms. You may receive an offer for the full amount upfront, and you may not. From a buyer’s perspective, it often makes more sense to ask for seller financing or an earn-out arrangement. These arrangements help to mitigate risk for a buyer, especially when they have low confidence in the business’s future prospects.

6. Work With a Business Advisor

Lastly, it is helpful to work with a professional business broker, or business Advisor, when selling a declining business. Experienced business brokers help you navigate the entire exit process, starting with a thorough valuation of your company.

In addition to giving you an accurate idea of what your business is worth, a good business broker will also be able to pinpoint your business’s strengths and weaknesses. If you have flexibility with timing, you can then use this information to improve your operations and build a more profitable business before selling it.

They will also help you market your business in an honest yet flattering way, allowing you to attract more qualified buyers. They will also guide you during negotiations, helping to build rapport with the buyer while working toward your (realistic) exit goals.

Conclusion

While selling a failing business can be a daunting task, success is definitely still possible. However, it requires you to take the right approach. By setting realistic expectations, being transparent, having a flexible approach, and enlisting the right help, you can still achieve a profitable and successful exit.