What Makes a Small Business Unsellable? It’s the Fees

I often hear people say that some large percentage of small businesses are unsellable and it seems that the reasons cited often boil down to blaming the business owner for not doing the work necessary to prepare the business to be sellable. 

While I do think the business owner should take responsibility for whether the business is sellable or not, I have been thinking more about whether the lack of preparation from the business owner is actually the problem in most cases.  

Indiana Business Advisors put together a nice infographic that outlines the “reasons why a small business won’t sell” 

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I have a theory that many of these listed reasons might actually be related to an overarching reason that makes it really difficult to sell a small business for less than $1 million dollars (and remember roughly 90% of small businesses will sell for less than $1 million). 

I think it is the fees.  

The “standard way” to sell a $1 million small business involves the following expenses:

• Hire a business broker to list the business - 10% of sales price - $100,000
• Business appraisal / valuation - $10,000
• Tax accountant for the seller - $10,000
• Legal Fees for the seller - $30,000

Total Seller Fees = $150,000

The buyer should expect the following expenses:

• Legal Fees - $10,000
• Tax Accountant - $10,000
• Quality of Earnings Report - $20,000
• SBA Loan / Bank Fees - $20,000

Total Buyer Fees = $60,000

Certainly some of these expenses could be optional, but you can see a path to paying over $200,000 in fees on a $1 million small business acquisition.  

BUT that’s not all.  

It is quite common for a small business seller to provide some of the financing for the acquisition through a seller note which means the buyer will pay them the seller note portion of the purchase price over time.  Let’s assume a seller note for 10% of the purchase price. 

Then you have to consider capital gains taxes which we can use 20% capital gains tax as a standard.  

I created this little calculator just to visualize how much cash the seller will end up with on day 1 after selling their business at different prices and it is pretty shocking.  

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In these examples a seller who sells a business for $100,000 may end up with less than 50% of that in cash on day 1, and a $1 million SMB may provide $600,000 for the seller on day 1.  

So my theory here is that once a seller realizes how little they are actually going to receive after selling their business they decide to walk away from the deal.  In many cases I imagine they would just be better off running the business for a couple more years, auctioning off anything left at that point and shutting it down.  

I suspect that the “traditional way” of selling a business might just not work well for a business valued at less than $1 million dollars. 

But given the coming supply of businesses valued at less than $1 million that will want to sell, I think this provides an opportunity for SMB buyers to get creative and find great opportunities to buy a small business with a unique approach.  

I guess I am calling it “the SMBuyer way” but basically it is just a handful of core ideas that I think could make buying an SMB for < $1 million a great opportunity for both the buyer and the seller.