Five Things That Will Kill Your Business Sale Before You Even Go to Market

Five Things That Will Kill Your Business Sale Before You Even Go to Market

James Dixey — Founder and Managing Director    ·    7 min read    ·    James Dixey Limited

Most failed business sales do not fail in due diligence. They fail before the first buyer is even contacted, and the cause is almost always something the seller could have fixed if they had known to look.

EXECUTIVE SUMMARY

•  Most failed business sales do not fail in due diligence. They fail before the first buyer is contacted, and the cause is almost always something the seller could have fixed if they had known to look.

•  The five killers, in order of frequency: a price expectation rooted in nothing; accounts the buyer cannot read; a business that is just the owner with a logo; customer or contract concentration that has not been managed; and structural skeletons (DLA, lease tail, IP location, lapsed accreditations, regulatory open actions).

•  Customer concentration thresholds: above 25% of revenue from a single customer triggers buyer pricing adjustments; above 40% can stop a deal entirely. In regulated sectors, single LA frameworks and NHS contracts are the equivalent.

•  Every one of the five is fixable in the twelve to eighteen months before going to market. None is easy to fix once a buyer is in the room.

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After two decades of running sale processes across education, care and several other sectors, here are the five things our team sees kill a sale most often before it has even started. None of them is fatal if it is identified six to twelve months before going to market. All of them are very hard to fix once the buyer is already in the room.

1.  A price expectation rooted in nothing

The most common deal-killer we see — and the one least often discussed in broker content — is a number in the owner's head that has no relationship to what buyers will actually pay. This usually comes from one of three places: a multiple a friend got in a different sector, a valuation done on assets rather than earnings, or an emotional figure that reflects what the owner has put into the business rather than what it is worth in the market.

A serious advisor will give you an honest indicative range early in the relationship, sometimes painfully early, before you commit to going to market. If the range is materially below your expectation, you have a decision to make: trade for another two years and grow into the higher number, accept the market price, or restructure the business so it commands a premium. What you should not do is take it to market anyway and discover the same answer three months later, with the buyer pool now educated that your business did not sell.

What you should not do is take it to market anyway and discover the same answer three months later, with the buyer pool now educated that your business did not sell.

2.  Accounts the buyer cannot read

The most common technical deal-killer is financial information that does not tell a clean, defensible story. This is not about the business being unprofitable — buyers can work with a difficult trading year and a credible recovery plan. What they cannot work with is accounts where the owner's personal expenses are blended in with the business, where related-party transactions are unexplained, where the gap between management accounts and statutory accounts is unreconciled, where the director's loan account has not been cleared down (or where the route to clearing it down before completion has not been thought through), and where there is no normalising EBITDA bridge to walk them from reported numbers to the underlying earning power of the business.

In our experience, the gap between reported profit and defensible adjusted EBITDA is 20–40% for a typical owner-managed business in the £1m–£10m range. None of that is in itself a problem — buyers expect to make adjustments. What kills the deal is presenting the gap as a single number with no working underneath it. Every add-back evidenced, every personal expense separated, every related-party transaction explained. That's the price of admission.

3.  A business that is just you with a logo

Buyers do not pay for businesses that cannot operate without their owner. They will pay something — but it will be heavily discounted, often with a long earn-out attached, and the buyer pool will narrow to those willing to do the rebuilding work themselves. If you are the head of sales, the head of operations, the relationship lead with the top three customers, the only person who knows the back-end systems, and you want to exit fully on day one, the arithmetic does not work for the buyer.

The fix here is the longest-running of the five. Twelve to twenty-four months to build a second tier, document the systems, transfer the client relationships and prove that the business runs on Mondays when you are not in. Owners who do this work consistently sell for materially more than those who do not, and they sell to a wider buyer pool.

4.  Customer or contract concentration you have not managed

If a single customer accounts for more than around 25% of your revenue, you have a concentration issue. If they account for more than 40%, you have a deal problem. These thresholds are not arbitrary. In the deals we've completed where a single customer represented over 25% of revenue, the buyer either applied a discount or structured an earn-out around the retention of that specific contract. Above 40%, we have seen otherwise-clean deals fall through entirely as buyers concluded the concentration risk could not be priced acceptably for both sides.

In regulated sectors the equivalent is contract concentration — a single local authority framework, an NHS contract, or an Ofsted-registered placement panel up for retender inside eighteen months is the same problem in a different form. A care home with 60% of beds funded by one LA, or a children's services provider with a single commissioner, will narrow the buyer pool to those willing to underwrite the retender risk.

This is fixable, but rarely fast. New customer acquisition takes time and the trend has to be visible in the numbers — a single new contract in the month before going to market does not solve a five-year concentration.

5.  Structural skeletons you have not addressed

The fifth killer is everything else that should be sorted before a buyer's lawyer ever sees it. The lease that expires in two years with no renewal option. The IP that sits in the wrong entity. The shareholder agreement that does not include drag-along rights. The historic VAT issue you have been hoping nobody asks about. The unexplained intercompany balance with a dormant group company. The CQC or Ofsted rating that has not been formally responded to. The lapsed BAFE or NSI accreditation that nobody got around to renewing.

None of these is automatically fatal. All of them are far easier and cheaper to fix before going to market than during diligence. A buyer who finds a structural issue mid-process will, in the best case, ask for a price reduction or an indemnity. In the worst case, they will use it to walk away and use what they learned to bid lower on the next process they see in your sector. We have seen processes collapse in the final fortnight over a four-figure VAT issue that would have cost a couple of hundred pounds in accountant time to fix six months earlier. The owner who fixed the same issue six months earlier paid their lawyer once and never had the conversation.

The pattern

The pattern across all five is the same. Every one of them is identifiable months before going to market by anyone with experience in the sector. Every one of them is materially cheaper to fix in advance than to negotiate around in the middle of a live process. And every one of them, left unaddressed, will at best cost the seller real money and at worst kill the deal entirely.

If you are within twelve to eighteen months of wanting to sell, the highest-value thing you can do today is sit down with someone who has run sale processes in your sector and stress-test the business honestly against this list.

Related: The owner-manager's exit checklist: what to do in the twelve months before you sell.  (/guides/owner-manager-exit-checklist)

Twelve to eighteen months from a possible sale?

Get a confidential, no-obligation valuation now. We'll tell you which of these five killers most affect what your business is worth today, and what twelve months of preparation could realistically add to the number.

Get a valuation  →

SOURCES

[1] Public market commentary, regulator guidance and named investor disclosures as cited in the body of the article.

James Dixey Limited — Specialist M&A for regulated, owner-managed businesses in Care, Education, Fire & Security and Other Regulated Services.