Common reasons why owners sell their business
While a successful business often generates substantial income, there are a number of common reasons why owners sell. This article looks at six of them.
An unrefusable offer to buy
One way to grow a business is through the acquisition of others, usually established or growing ones in the same market, or in the same industry in a different vertical.
If a buyer has spare cash and there is pressure from investors to gain a higher rate of return than holding it in a bank might yield, buying a business can be a good investment. Your business might have access to customers, employees, products or intellectual property that would increase the value of the acquiring business by more than the acquisition price.
Businesses that are not actively being marketed for sale often receive offers, even if they are not profitable.
Health or personal issues
The majority of small and medium sized businesses rely on the person or small number of people who started it.
If that person, or any of those people suffers from poor health and personal issues (such as the death of a family member), the performance of the business is likely to suffer. A quick sale may not only preserve the value of the business for the owner, but also preserve the business for other stakeholders such as customers.
The sale of a business because of personal issues is unlikely to be a decision that is made if the owner believes that the issue is short-term. It is more likely to be made as a result of reflecting on lifestyle and life choices some time after the initial shock.
Like health or personal issues, retirement is a change in lifestyle (albeit a voluntary one rather than an involuntary one).
Cashing out in order to pursue other non-business interests is common.
If you are considering selling your business in order to retire, it shouldn't be something that is rushed. A quick sale may remove the obligations of work, but may not give you as much money for the business as holding out a little longer might. Alternatively, planning for retirement should be undertaken well in advance of the date you want to retire.
Because the objective of retirement is often to cash out, a seller may only look at deals that are completely cash based upfront. It may be possible to get a better price by accepting terms that don't give an immediate full payout, including a work-out (effectively reduced employment or consultancy) or a staggered buy-out (where shares are bought in a series of transactions, effectively transferring control and profit taking to the new owner over time).
Taking full value of capital
Although a reward of being a business owner is a share of the income that the business generates, sometimes having the value of the business now is more valuable than having the stream of income over the future.
Capital can be used in other business ventures or for personal reasons (such as buying a new home).
Recognising when you have taken the business as far as you are able to take it yourself, you might also recognise that the value can be further increased (or put to use) not in the business, but elsewhere.
Businesses founded by multiple people rarely stay owned for long by all the founders.
Disagreements over the running of the business, or the strategic direction in which it is heading can lead to one or more of the founders selling out.
Important to the valuation of the business is control - how much control would the new owner have, and could similar disagreements be avoided with a change of ownership?
A 5% minority share in a company might be worth much less than a twentieth of the value of the whole company, simply because a buyer of the whole controls the future direction, whereas the buyer of a minority stake has much less say.
Struggles with a low performing business
Sustained poor performance can be a key driver in an owner’s decision to sell. It’s not psychologically easy to continue as a business fails and profits drop. It can be better to move on, sell up, and find something new to work on.
There are many entrepreneurs who specialise in buying failing businesses and turning them around, so there are opportunities to sell, even if the business under-performing.
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- Does not provide a complete or authoritative statement of the law;
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