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.
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:
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.
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.
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:
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.
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.”
Being a founder is a tough and lonely road, whether there are multiples founders or not. Sometimes it is reassuring to know you are not alone. This post covers the common reasons why people decide to sell their businesses. If you have decided now is the time to sell, the follow-up blog How much is my business worth? will follow on nicely. In reading this, it will also be helpful to keep in mind that for every one good reason to sell your business, you will have about a dozen reasons NOT to sell your business.
Selling takes an emotional toll
The journey for a business owner who has decided to sell their business can be a very challenging; both physically and emotionally. It is human nature to put our ‘blood-sweat-&-tears’ into our most valuable assets, and for an entrepreneur, this is your business. When you decide that now is the right time to sell, regardless of the reason, it is generally a painstaking process. Avoid navigating these waters alone, as discussed in last week post Why you should hire a sell-side consultant. The following list is some of the most common reasons businesses are sold. Another way to look at this, the following list might make you consider selling.
This is surprisingly the most common reason a business is sold, behind retirement. General fatigue, boredom, and burnout can have very negative impacts on productivity and therefore your company value. When your business idea is young and fresh excitement brings you into the office. When that dies, you should consider getting out. Beyond the actual stress, many owners simply sell because they are no longer challenged or interested in the business’ operations. Businesses can go stagnant, often outside the owner’s control (industry shifts), and this generally results in boredom and dissatisfaction with one’s work life.
Running a company requires a significant investment by a business owner, and this is generally more by way of their time than actual capital. Running the business becomes a daily routine and it can be very hard to break old habits. Entrepreneurs are generally passionate, driven individuals who love what they are trying to achieve. If they do not reach the “I’m over it” stage, mentioned above, an entrepreneur will generally stick with it until they can no longer physically keep up. This happens when it is finally time for them to retire. In the post, Always be prepared and ready to sell your business we discussed that planning this year’s in advance, and always being ready, will translate into more money for retirement….maybe an extra few trips to Hawaii!
Life doesn’t always follow the path you intend. Should the owner or a close family member be distressed with a major sickness, they will look to sell. Linking to the point above, having your business ready to sell will help alleviate some extra stress. Divorce is also a common reason for selling a business, sometimes not by choice. Should a married couple both have ownership in a company, selling the company may be a necessity as part of the settlement.
There are more curveballs in a year of business than during an MPL season. Unexpected events are not just common, they are the norm. One-offs are manageable, but seemingly small events can continue to build, and together they can become overwhelming. Business owners can become relaxed with their operation and their lifestyle. This attitude can, and often does, aid the formation of a habitual routine that results in an overlooking of the big picture which puts a business in harm’s way and can force a sale. A few common examples of this are
Failing to act/prevent these short-term issues can lead to a premature sale, and typically will lead to a sale price lower than anticipated.
The economy is strong and valuations and investments are growing. A strong economy not only means increased earnings for a business owner but an increased wave of entrepreneurs. Business operations that have been running for 20+ years must innovate and respond to the rapidly evolving market; or be passed by. The alternative is selling when the company is competitive and before these positive trends have passed. This decision can lead to an increased sale price. What normally get is in the way here is pride and stubbornness.
When entrepreneurs start a company or acquire an existing company, one of the long-term goals is generally to sell in 5, 10, or 20 years. Business plans will always change, especially in the start-up scene. With that said if a targeted exit date has been set, trends show that business owners are determined individuals and abide by their own terms. As a result, many companies are sold because of a personal timeline set by that owner.
If you are in a good industry and have a well-oiled machine you may get approached for sale. When opportunity knocks most business owners will welcome it with open arms. Most business owners, except the odd entrepreneur trying to change the world, will hope to hit the financial jackpot. This could be an unexpected offer to purchase from a very motivated investment group, or because a business owner has grown a successful business in an ultra-hot market. These drifts come and go, from industry to industry and at times they may be many years apart. The smart business owner who recognizes these opportunities will strike while the iron is hot. Sellers beware, don’t rush into a sale and let a keen investment offer blind you. Whilst sold competitors can serve as a guideline for a multiples calculation, they often need to be adjusted (which I explain in my next blog). The opinion of professional sell-side experts is very important. We often see hundreds of thousands, if not millions of dollars, left on the table by an uninformed seller.
Remember, you are not alone
For whatever reason you decide to sell, remember you are not alone. Talk to other business owners, in particular, those that have sold, and ask their advice. Each business has a unique personality, and this personality generally reflects the owner and how they think of business. Reasons to sell a business come in a variety of forms. This blog only covered off several common reasons, there are more. But regardless of why you are looking to selling, as a responsible business owner, we recommend you should protect yourself and company by investing in a sell-side consultant who can clearly identify the fair market value of your business when you do decide to sell.
Every successful entrepreneur desires to obtain top dollar for the value of his/her enterprise. They’ve spent the time working it and slaving over it. And many entrepreneurs have a good idea, or at least think they do, of the tangible and intangible assets which are housed in their business. Because of this many business owners make assumptions about what their business is worth and what type of sale price they should obtain when it comes time to sell the company.
Sometimes they under-predict the value and sometimes the value is grossly over-predicted (which is more often the case than the former). In addition, Type-A personality business entrepreneurs can often have a hard time being flexible on a number of aspects during the sales process. The key to being flexible is coming into the transaction with the right expectations. The following will give an idea of how this can be done effectively.
Being Flexible on Business Valuations
When it comes to the worth of your business, no one—and I mean no one—can question your dedication. That may be one of the primary reasons you went into business for yourself in the first place. However, many business owners may not rightly know the proper valuation of their company and all of the tangible and intangible assets associated therewith. Whether an entrepreneur has a skewed view in a favorable or unfavorable way, it does not matter. What is important is that the owner be flexible when going into preparation for the business valuation.
Once a proper valuation has taken place, both seller and advisor should be in agreement and see eye-to-eye. Proper preparation in the planning and valuation stage is essential. Make sure you are at least somewhat flexible on price.
Hopefully, you have the luxury of finding that right strategic buyer who is willing to pay more than the book value for your company. If you find this to be the case, count yourself lucky. However, if fate does not smile upon you that handsomely, then you may have to wait. Downgrading below what your broker has stated however, may not be wise either, especially if you have the time and are not in a rush to sell.
*Side note: Many business brokers may downgrade your business to sell it quickly. Sellers beware. Make sure the broker is not too hasty when it comes to the preparation, valuation and sale of your company. While you need to be flexible, make sure the M&A advisor you decide on is thorough and fair when it comes time to value and put your business up for sale. Much like a real estate agent, don’t allow an advisor to leave any money on the table because they simply want to go through with the deal. This type of behavior is simply uncalled for and unethical.
Flexibility With Deal Terms
Of course you would like an “all cash” deal. That is ideal. Everyone who sells their company will want to get a premium for the business and have it paid in cash. Unfortunately, that is not the reality for every sale. In most instances, there can be a combination of arrangements which will need to take place when the transaction itself takes place. If buyers are too rigid here, they can miss out on a good deal which could be helpful, but which may not be cash.
Be Flexible on a Buyer
When it comes to selling your company, it is like letting your daughter get married to the right suitor. It can be a very emotional experience. Handing over the keys to the Bentley to the next owner can cause some entrepreneurs a great deal of frustration and even some rigidity.
For instance, some business owners want to find the right buyer who has the very best fit for the business itself and its customers. While we do not advise taking all emotion out of the process, we do advise to determine to be less picky when it comes to a buyer. Some businesses, such as dental practices can require a bit more of a search to find the proper replacement as many patients and/or clientele have an emotional bond to the owner of the business and the company may need a similar figure going forward. For the most part, however, emotion should be assuaged and the decision should be based more from the numbers.
*Side note: this is not generally a problem, because most owners are fine with just getting top dollar for their enterprise. There are some limited examples where sellers tend to become a little picky on the buyer.
Be Flexible on Time
I will make this short and sweet. Valuations take time. Finding and courting buyers takes time. Finalizing the deal takes time. Being flexible and patient throughout the entire sales process and all will work out just fine. If the deal is right for you and your business it may take between 6 to 18 months from start to finish. So, don’t get nervous about selling. If you truly own a business that has real economic value, there is a buyer out there who will certainly want to snatch it up. Having the right network of people in place to find a buyer is extremely important.
While you may not be ready to sell your business today or even this year, it is best to start courting business brokers early in preparation for your timely exit from the company. If all of your sales documentation is ready to present when the market is at a high point, you will be able to sell your business for its highest possible price. Begin now, prepare early and discuss options with an advisor today.
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.