According to research by the Association of M&A Advisors and Pepperdine University, 80% of lower middle market business owners that have decided to sell their company are rejected by financial intermediaries as “Not Ready”. Of the 20% that are brought to market, only 3 out of 5 successfully close a transaction.

That so few of these firms ever find a buyer is a sobering thought, not just for the owners involved but also for the broader impact this breathtaking failure rate represents for jobs and the overall economy.

So, what does it mean when a business owner is told "Your company isn't Ready" to be brought to market?

When assessing their own company's attractiveness as a M&A target, most owners will understandably focus on their financial position as described in the P+L (the almighty EDITDA) and what they have heard from peers and others about closed deals and market multiples for businesses of their size and type.

And that's where the owner's efforts to prepare the company for sale usually ends.

The reality is that business financials are simply the "Table Stakes" that get the business into the game, but do not guarantee that the owner walks away a winner.

For business owners, a more effective approach for successfully selling their company would be to think of putting the financials in top condition as just one step in a significantly broader process of becoming “Capital Ready”. This process would be designed for improving not only the likelihood of a transaction, but also the size AND the multiple the business will justify.

When viewed this way, the financials are really a trailing indicator that represent the positioning and effectiveness of the company in three key areas... Model, Market & Management.

Each of those three areas deserves its own dedicated article, but a brief story may shed light:

While engaged in an 18 month turnaround of a large commercial leasing firm (250 employees, $80 Million Revenue), our insurance company parent announced a fire sale of all finance operations. Those aren't the best conditions for maximizing value, but we moved forward with Lehman Bros as our banker. Their estimate was that our financial performance justified a sale premium of $65-80 Million.

As the field was reduced to 2 serious bidders, discussions with each took divergent paths. One was interested primarily in absorbing our assets, cash flows and customer relationships into their existing operations and bid within the range predicted by Lehman. The other bidder had interest in the financial assets but had other ideas about what our recently enhanced Business Model, Market Positioning and Management Team could do for them in the long term as an ongoing business. They won the auction with a bid more than double Lehman's estimate, a $163 Million premium.