Yes, you can sell a business with declining revenue. Falling sales can affect your company’s value and make buyers more cautious, but they don’t automatically prevent a sale.
Buyers will want to understand why revenue is declining, whether the business remains profitable, and how those changes could affect future earnings. Depending on your circumstances, you may benefit from improving the business before selling, or moving forward now with realistic expectations about valuation and deal terms.
In This Article
- When Declining Revenue Complicates Your Exit Plans
- Why Is Your Business Losing Revenue?
- How Does Declining Revenue Affect Business Valuation?
- Should You Sell Now or Improve the Business First?
- How Can You Make Your Business More Attractive to Buyers?
- What If You Can’t Afford to Wait?
When Declining Revenue Complicates Your Exit Plans
Declining revenue can make selling your business feel like an uphill battle. Maybe you’ve lost a major customer, sales have slowed over the past few years, or competitors are taking a larger share of your market. Your business is still making money, but you know buyers will notice the downward trend.
Does that mean you’ve missed your chance to sell at a reasonable price? Not necessarily.
Buyers want to understand the risks they’re taking on and whether the business can continue generating earnings after the sale. Deciding whether to sell now or make improvements first can have a significant effect on the outcome.
Why Is Your Business Losing Revenue?
Before deciding how to approach a sale, you need to understand what’s causing the decline. Sales may fall because of an industry slowdown, changing customer demand, stronger competition, or the loss of a major contract.
Sometimes, lower revenue results from a deliberate business decision.
For example, imagine a manufacturer that stops producing several low-margin products. Annual revenue drops, but the company maintains its profits while reducing expenses and freeing up production capacity.
Now imagine another manufacturer experiencing the same decline because several major customers have switched to competitors. Even if the business remains profitable, buyers may worry that more customers will leave.
Both companies have declining revenue, but they present very different risks.
Start by reviewing sales trends across customers, products, services, and market segments. Look at when the decline began, where the biggest losses occurred, and whether those problems are continuing.
Understanding the cause helps you explain the situation to buyers and decide what needs to change.
How Does Declining Revenue Affect Business Valuation?
Buyers care about revenue, but they’re usually more interested in what the business earns and whether those earnings can continue.
A company can experience declining revenue while maintaining healthy profits. Meanwhile, another business might maintain its sales while rising expenses eat away at margins.
Consider two businesses:
- Business A generates $4 million in annual revenue, down from $5 million, but has maintained consistent earnings and cash flow.
- Business B generates $5 million in annual revenue, but its operating expenses are rising and profits have declined significantly.
Business A may be the more attractive acquisition despite having lower sales.
Even when profits remain steady, buyers will want to know whether the company can maintain those earnings if sales continue falling.
If future profits appear uncertain, buyers may offer a lower purchase price or propose deal terms that protect them against further declines.
Profitability, cash flow, customer retention, and the sustainability of earnings all help buyers understand what declining revenue means for the company’s future.
Should You Sell Now or Improve the Business First?
If your business is still profitable, you may have time to address the problems affecting revenue before going to market. However, waiting isn’t always the right choice.
Let’s say sales have declined because you’ve neglected business development. Rebuilding your sales pipeline or improving customer retention could help stabilize revenue. Showing buyers several quarters of stronger performance may improve their confidence.
Keep in mind that improvements cost money and take time, though, and there’s no guarantee of a higher selling price.
On the other hand, an owner approaching retirement might not want to spend another two years rebuilding sales. And if the decline reflects broader industry changes, waiting could make matters even worse.
Before deciding, consider three questions:
- Can you realistically fix the problem? Losing customers because of poor service is different from facing a long-term decline in demand.
- What will improvements cost? Consider the time, money, and effort required, along with how much they could increase the company’s value.
- What could you get for the business today? Understanding its current marketability gives you a baseline for comparing your options.
Focus on improvements that are likely to increase your business’s value enough to justify the time and money involved.
How Can You Make Your Business More Attractive to Buyers?
Even if you can’t immediately reverse declining revenue, you may still be able to strengthen the business in ways that matter to buyers.
- Protect Your Profit Margins and Cash Flow
If sales aren’t growing, look at how much of that revenue you’re keeping.
Review pricing, operating expenses, supplier agreements, and the profitability of individual products or services. You may find opportunities to reduce unnecessary costs or focus on more profitable work.
Avoid cutting expenses that support future sales or essential operations. Buyers may question higher profits if they come at the expense of the company’s long-term health.
- Strengthen Your Customer Base
Losing customers can be more concerning than losing revenue, especially when a business depends heavily on a few major accounts.
Review customer retention and purchasing patterns. If a handful of customers account for most of your revenue, finding ways to diversify could make the business less risky.
Improving customer service, addressing recurring complaints, or reconnecting with inactive accounts may be practical starting points.
- Reduce Dependence on the Owner
A business facing declining revenue becomes harder to sell if everything depends on its current owner.
Buyers want to know that employees can manage operations, maintain customer relationships, and solve problems after ownership changes.
Document important processes, develop your management team, and make sure key responsibilities aren’t handled exclusively by you.
These improvements may not increase revenue, but they can make the business easier to transfer.
- Get Your Financial Records in Order
If revenue has been falling, expect buyers to ask questions.
Prepare accurate financial statements, customer and revenue breakdowns, and realistic projections. Be ready to explain when the decline began, which areas were affected, and what you’ve done to address it.
A clear explanation backed by reliable financial information is more convincing than optimistic forecasts you can’t support.
What If You Can’t Afford to Wait?
Sometimes, selling sooner is the better option, even if the business isn’t performing at its best.
A profitable company with declining revenue may still appeal to buyers interested in its customer relationships, workforce, equipment, or market position.
Strategic buyers, such as competitors looking to expand, may see opportunities that aren’t fully reflected in current financial performance.
However, be prepared for buyers to account for the risks they’re taking.
That could mean accepting a lower valuation or considering alternative deal structures. An earnout may tie part of the purchase price to future performance, while seller financing could help make a transaction possible. Both involve risks that need careful consideration.
There’s also a difference between declining revenue and a business that’s consistently losing money. Financially distressed companies face additional challenges involving debt, cash flow, and their ability to continue operating. Selling under those circumstances often requires a different approach.
If your business remains profitable, though, declining revenue doesn’t necessarily mean abandoning your plans to sell.
Selling a Business With Declining Revenue Starts With Understanding Your Options
Declining revenue doesn’t automatically mean your business has lost its value or that you’ve missed your opportunity to sell.
Understanding why sales are falling, how those changes affect future earnings, and whether improvements are worth pursuing can help you make a more informed decision about your exit.
The Rock Bridge Group helps business owners evaluate their companies, identify opportunities to improve their value, and prepare for a successful sale.
If you’re considering selling a business with declining revenue, give us a call at 800-395-7653 or contact us online to discuss your options and determine the best path forward.