08 Nov Reasons Not to Sell Your Business: Why Selling Your Company is a Bad Idea for Most Business Owners
We’re big advocates of selling your business. It’s what we do. It’s what our clients pay us for. But we’re also deeply interested in the mutual success of both ourselves and our clients. As the saying goes, “discretion is the better part of valor.” Oftentimes holding out, waiting or altogether backing down is the best of all strategies when it comes time to sell the farm. For most, selling a business is not the most ROI positive strategy, especially if there are still good working years left. Enumerated below are a few of the potential reasons why.
General Industry or Market Factors
The “buy low, sell high” strategy definitely comes into play in nearly every business divestiture scenario. Those will the foresight and outright luck who were able to sell their businesses prior to 2008 and the financial implosion that followed can attest firsthand to the benefit of “timing.”
Furthermore, industry-specific factors also play a big role in when to sell or not to sell. Some rhetoric may prove helpful:
- Is your industry still growing? Is the growth double-digits year-over-year?
- What are your industry colleagues and competitors doing? Are they selling-out, holding-out or getting out?
- Does there seem to be a trend of general industry consolidation? Are the major players getting bigger?
- How are your margins? Is there a squeeze or do cash flows continue to improve thanks to industry-related cost and revenue drivers?
Because holding-out on selling your business should be partly a financial decision based on both internal and external factors, it is important to obtain the 30K-foot view of your market, its trends and how things may play-out in both the short and long-term. When a high probability for market improvement or growth exists, it’s often best to hang on a little longer.
Long-standing, consolidated and steady-state industries can leave little room for growth. Conversely, high-growth industries or those poised for significant upward swings are a bit more enticing. Owner operators are consequently more incentivized to maintain ownership in hopes that doing so may provide opportunities to ride the wave to its peak.
A big fear for many entrepreneurs and middle-market business owners is the potential that they’ll sell too early, giving the acquirer all the excess gains available in the business after the eventual industry flood arrives.
Shareholders may also hold-off due to shifts in strategy to significantly grow the business via sales, marketing or partnerships. If the business forecasts coming from an updated sales and marketing models pegs the business making massive gains in the next several quarters or years, it makes sense to hold-out until the valuation of the company has completely peaked.
If tax has never dictated, altered or influenced the decisions you make in business, you’re probably a very rare outlier. The fact is that many business and personal financial decisions ride on what the tax structure is, what the Fed does and how the federal and local governments treat businesses like the one you operate.
Some potential reasons to hold your horses on selling might include expectations of future tax decreases (which is, at this juncture, highly unlikely) or perhaps you’re averse to simply taking a lump-sum payment with the ensuing lump-sum tax. Milking your baby for a few more years may be what is requisite for personal financial goals and not necessarily solely based on tax, but tax can certainly play an influencing factor in the decision not to sell.
Family & Personal Reasons
The spectrum of family and personal reasons which may hinder someone from selling are as broad as one could possibly imagine. The reasons could range from aging (or youthful for that matter) issues to personal and family goals and/or aspirations. In some cases, owners, operators and shareholders may feel pressure from family members both in and outside the business to “keep it in the family.”
Certainly the personal factors limiting the sale of a business should be weighed individually, but we never underestimate their importance. In fact, they can often represent some of the most emotionally-charged and difficult aspects of any decision to exit the business.
Essential business costs can harangue the efforts of any effective investment banker with hopes of maximizing the selling price of a client’s business. Controlling costs prior to engaging in any strategic business auction is one of the best ways to improve the bottom-line and boost the valuation immediately. One of the principle value-ads we use in our merger consulting with clients is the ability to significantly boost valuations prior to the time of sale. For the patient seller, we’ll work with them, spending several months looking for ways in which we can cut costs, improve efficiencies and prepare the business for a maximum payout.
Waiting to sell a company to simply spend time controlling high and unwieldy costs can be one of the best ways to maximize EBITDA and the liquidity event at closing.
Employee and HR Reasons
Unfortunately for employees, M&A activity is often unkind and unpleasant. Holding out for the right buyer who’ll promise to not significantly rock the boat after the deal close can be a strong motivator for keeping the acquiring sharks at bay.
A current client of ours fits within this type of buyer. He wants to sell for personal reasons, but has built long-lasting and deep relationships with his senior managers and desperately wants to see them remain onboard long after the deal is done. Due to the nature of his business, he recognizes his headcount is too high for maximum efficiency and doesn’t want to “cut costs by cutting heads.” In his case, it doesn’t mean the deal will not occur, but it may mean his eventual sale will occur with an entirely different deal structure and on terms that make sense for the employees.
A final employee issue that could cause an owner to hold-out on selling the company may be due, in part, to a desire for engaging in a sellout via ESOP (employee stock ownership) or a sale to a current key employee.
Legal and litigation issues can be one of the most detrimental hurdles to overcome in the deal-making process. For the business owner with significant current, on-going or potential legal, holding out may be the only requisite option. Because litigation represents a proverbial skeleton in the closet that acquirers typically ovoid like the plague, wrapping-up any loose legal ties is simply a best practice to follow in any potential business merger or acquisition scenario. Litigation and unwanted legal actions against a company can also put the company’s future at risk al together.
Apart from the risk of litigation, other areas of risk exist that may slow down the motivation and ability of a business owner from selling the company. Some of these could include:
- Government Regulations
- Environmental Issues
- Health Risks
None of these issues is completely crippling to the idea of selling, but I can think of specific instances where each has played a significant role in motivating an owner to wait later for a business sale.
Waiting to sell is sometimes motivated by successors or lack of potential successors. Owners without succession plans, may need more in-depth planning prior to the sale and divestment of the business. For family-owned enterprises, some owners would like to wait until the proper age and training of the next generation of qualified managers before they take next steps is selling part or all of the business and its assets.
From the acquirer’s perspective—and in particular financial acquirer’s perspective—buying a business with an existing succession plan complete with plug-and-play experienced management on board can be a huge boon for PE groups simply looking for dividend-producing silent-ownership.
Purpose and Drive
Perhaps you’ve not yet reached the point of business “burn-out.” Those who’ve been there know precisely what it is when they reach it. It’s that place when the business no longer is the autonomy-providing blessing it once was. Sometimes owners hold-out until the blessing becomes the ole’ ball-and-chain. For some this can frontload much of the urgency just to get out quickly. Others simply want to continue to work the business until they grow tired of working in an operating role and finally reach that point when they say, “it’s time.”
Oftentimes busy and driven owners are afraid of what the next step will hold. Some hold out simply because they want to keep working in the business because that is where they experience the most fulfilment and purpose. Fear of the unknown next step can be a huge driver for proprietary owners who’ve worked in and on the business for decades.
Whatever your motivation for not-selling, we’re convinced there are hundreds more reasons to take the plunge. Because the majority of our posts hear at the Deal Capital M&A blog deal with reasons to consider selling, I thought it appropriate to provide a few legitimate reasons NOT to sell.