Timing In Selling a Business is Everything
A business owner can spend his entire career developing a business until it becomes his “baby.” Selling can be the most difficult and emotional decision a business owner will ever make. It is filled with emotions similar to sending a child off to college or giving a daughter away at her wedding. The timing and reasoning for selling must be right. The reason for selling will also be a paramount issue for a prospective buyer. Fortunately, the best time to sell can be determined by 8 factors.
1. Burnout / Boredom
If you have lost your passion for the business, dislike to go to the office, and cannot wait to leave, then you should re-read this book and begin formulating an exit plan. As burnout and boredom are the most common reasons for an owner selling his business.
2. Retirement (age)
At some point in life, the time comes to reap the benefits of years of hard work. This is another common reason for sale in the industry. From a buyer’s perspective, this is the most justifiable reason for sale, which creates a comfort level when analyzing a business.If the owner does not have a family member to pass the business to, he is faced with the prospect of selling. Listing retirement at age 40 is not an acceptable reason to sell for most buyers. Conversely, a business owner retiring at age 50+ who has been in the business most of his life is an excellent reason for selling from a buyer’s perspective.
Health is a very unfortunate reason for selling since it is usually out of the control of a business owner. Often, the sale must be quick because of a decline in sales and a void of top decision making due to less time being spent at the business by the owner. Structuring a deal for a quick sale due to the owner’s health does not have to be for a lower price. A seller can set up a low-down payment and longer owner note which will keep the sale price at the highest justifiable level, while getting the owner out quickly. You should be leery of potential buyers that attempt to get a bargain, because of a seller’s vulnerable position.
4. Economic factors
In addition to being ready to sell and having a solidly profitable business, the economic marketplace must have its “stars” aligned in order for it to be a good time to sell. An ideal scenario to sell is when there is a strong economic environment of low-interest rates, a growing stock market, a strong dollar, low inflation, low taxes, and a solid availability of capital. It is always a good idea to keep up with economic trends. While a bad economic setting does not help a sale, a good, profitable business will sell under most economic conditions: good or bad.
5. Lack of operating capital / Need for growth capital
If it were not for capital concerns, many business owners might never sell. There comes a point when the continued worry of funding accounts receivable, payroll, or the rent will push a business owner over the edge. You say to yourself, “If I just had some more capital I could do X, Y and Z and double the business.” This is like burnout and many times the business will flatten out due to a lack of motivation. The salability will suffer as well as the sale price.
6. Industry overview
To know the future of an industry. If the industry is heading in a bad direction, it is wise to evaluate the options. It would be unwise to suggest that every time an industry dip or change occurs that an owner should think about selling, but a management style that has proven successful in one climate may be challenged in another. The most common response is “I can’t do anything about it, so why worry?” The more aware an owner is of upcoming changes in his industry, the more prepared he will be in evaluating his options. Informed sellers regularly attend local Chamber of Commerce meetings, annual industry conventions, read trade publications.
7. Employee stability
Employees are most company’s key assets, so make sure to have a solid team in place before you begin marketing your business. It does not matter significantly if a low-level employee is lost, but once you lose a key salesperson or operation manager you will start raising eyebrows during marketing. Nothing scares off good buyers more than key employees recently departing to the ranks of the competition. If selling is a near option it is a good idea to firm up relationships with key employees.
8. Sales / Cash flow
“Cash flow is everything.” The main scenarios when cash flow is not “everything” is when the assets are the only value of the company or if a competitor is just looking at your clientele. When analyzing a business, prospective buyers and lenders key in on even the slightest slip in annual revenue and cash flow. Even an annual dip as small as 2% will cause a buyer and lender to start wondering if there are significant problems in the business. We have sold businesses with drop-in sales in two and three consecutive years, but the final negotiated sale price suffered as a result.
Regrettably, the biggest mistake a business owner makes when he or she must make the biggest decision in one’s life — is they wait until the last minute to make that big decision?
Without proper planning, you can only receive a less productive result in selling your business.
You wouldn’t take on building a house from scratch without hiring an architect or getting a general contractor to help you with budgeting, or a decorator to help you with a design. You would reach out to a team of people the help you with achieving the best result.
Something like building a home seems to require more help than selling a business. Which is not the case as you have a list of advisors and information out there that a business owner needs to know before selling which can be around 100-200 different things. Such as, what are your tax consequences upon sell? What happens to you your management team? Will you have health insurance?
Make sure to plan well in advance so you experience a successful result at the time of sale.
The Vant Group is here to help guide you through the steps of buying or selling a business. Here’s a great article we would love to share.
Challenge: Navigating unexpected delays The Vant Group was representing a Middle Market Multi – National Company on the buy side. Our mandate was to assist this company with finding an acquisition target to diversify their cash flow.
Their criteria was pretty broad; find a cash flowing business that has the ability to grow. Our clients were pretty successful in their core business and had more than enough cash on hand to execute various size deals.
Within 5 months, we were able to find and negotiate a favorable Letter Of Intent on a service business that our clients were excited about. Although our clients had the ability to write a check (PAY CASH) for the business, it didn’t make much sense with interest rates as low as they were. Our clients decided to pursue conventional bank financing for this acquisition.
Issues we hit with Conventional Lender:
While our clients had a solid balance sheet, the business being acquired itself did not have any real tangible assets. The banks were leery of lending on this business without significant assets being held as collateral.
Moving parent company’s business to new bank
Our clients were open to discussing some form of collateral, but before we got too far down the line, many banks also wanted our clients to move over significant assets of the parent company to the new lender. This was a deal breaker for our clients due to the size of the parent company. Any issues with the bank transfer of the parent company could severely hurt the company’s cash flow.
Try SBA. We then decided to pursue SBA financing. On the surface, this was the ideal SBA target. The business has a strong history of cash flow that was easily verifiable against the tax returns. After 2+ months of delays, the deal was back on track.
Issue with SBA Process
SBA Citizen Requirement
One of the guarantors for the SBA loan is going to be the Multi-National Company. The company is a C-Corp with many minority shareholders who are not US Citizens. The president and CFO of the company were US citizens but they only made up 42% of the total ownership. In order for the company to act as a guarantor, the company must have over 50% ownership be US Citizens. The company needed to reorganize the shares in order to have the majority of the company have US ownership. This delayed the deal another 2+ months.
After the company restructured, we were able to get a term sheet for financing. But this took nearly a month.The deal has now been delayed more than 6 months and we are now just able to officially start the SBA process and furnish a bank commitment letter to the sellers. As anyone who has been involved with any acquisition can tell you, “Time Kills Deals”. The sellers had begun to lose any hope that these buyers would ever be to get this deal done. It was our job at The Vant Group to keep the lines of communication open between the buyer and the seller. We did everything possible to keep the sellers from backing away from the deal. And no one would have blamed the sellers from backing away at this point. While these delays were unique in nature, addressing delays is something that you may have to do on occasion as an intermediary. Being honest about progress as well as having a plan to move forward is what worked in this case.
We were finally able to close 10 months after signing the initial Letter of Intent. Both sides were happy and were glad The Vant Group was there to keep the process moving forward even if there were a few delays.
Compelling Reasons for Buyers / Seller Motivation
TVG has spoken with literally thousands of buyers over the years, asking them why they were interested in venturing into business ownership.
As former business owners and intermediaries counseling buyers, we have been in a position to take our own polls concerning buyers’ motivations. Although there have been many different answers, there are some basic motivations that continually reappear. It is our opinion that a short discussion relative to these motives can help put matters into perspective.
1. Controlling One’s Own Destiny
We have discovered that prospective buyers want to control their own destiny and perhaps the strongest motivation for those venturing out of Corporate America into the ranks of business ownership. As we question if this is a well-informed reason for buying; the idea of controlling your own future is largely a matter of perception. An example, many buyers believe that owning their own business means that the sky will be the limit because they are now free to go as far as their personal abilities will take them. While a seemingly unlimited profit ceiling might be a good motivator, many would-be owners overlook the many limiting factors on small business ownership. We find that by owning a business, not only does one bring his old set of problems with him, but he also inherits a new set of problems. There is nothing wrong with venturing into business ownership as long as a prospective buyer does a realistic assessment of his motivations.
2. Financial Reward
When buying a business, there should always be a balance between risk and reward. There is without doubt monetary reward in owning your own business. The lure of making substantial wealth attracts some buyers to the acquisition market. Many buyers have made a lot of money for their employers and now want to make that money for themselves. The prospective buyer needs to be realistic with the risk/reward proposition. Both sides of this equation need to be deliberated before starting the acquisition process. Buyers must understand that as an entrepreneur, owners get paid last.
3. Being the Person in Charge
Prospective buyers often mention that they are tired of being under the microscope, having a boss looking over their shoulder. The lure of not having a boss in business ownership is synonymous with controlling your destiny. In reality, the small business owner finds himself working for many bosses. Customers frequently tell the owner when and how high to jump. The small business owner sometimes ends up being the subordinate to the customer. In addition, lenders can seem like a boss dictating how things are to bed one. Perhaps the perception, that you have the ability to walk away when you want that is so appealing. The end result is that the obligation to earn a profit and stay afloat wins out over personal control of the owner’s workweek or independence.
4. Ability to Use Personal Skill Sets
Buyers have expressed that owning their own business will allow them to demonstrate their true abilities. Many displaced executives coming out of Corporate America feel they have certain abilities that will raise the business to the next level. It is equally important to look at the abilities that have been required of the existing owner to get the business to its current position. This experience, or the lack thereof, can be a key determinant of ownership success. In operating a business, an owner might find himself dealing with company management one minute, and delivery drivers the next.
5. Seller Motivation
A lack of seller motivation, as much as any other reason, can cause deals to fail. As intermediaries, we have found it absolutely imperative that we know precisely why a business owner is selling. Many buyers are skeptical of seller motivation and with good reason. It is understandable why many buyers question the sellers’ motivations. There are many other acceptable reasons why sellers enter the marketplace for their businesses.
6. Why Companies Are for Sale
A business owner can spend his entire career developing a business until it becomes his baby. Selling can be the most difficult and emotional decision a business owner will ever make. It is filled with emotions similar to sending a child off to college or giving a daughter away at her wedding. The timing and reasons for selling must be right, and the reason for selling should be paramount to a prospective buyer. A buyer needs to be assured that the reason for selling is not due to negative factors such as problems in the industry, increased competition, or employee problems.
Burnout / Boredom
A business owner can lose his passion for the business, dread going to the office and cannot wait to leave. Burnout and boredom are the most common reasons for an owner selling his business. If sales have flattened or started to decline, employee morale, customer service, and/or supplier relations may have deteriorated.
At some point in life, the time comes to reap the benefits of years of hard work. This is another common reason for sale in the business transfer industry. From a buyer’s perspective, this is the most justifiable reason for sale, which creates a comfort level when analyzing a business. If the owner does not have heirs to pass the business to, he is faced with the prospect of selling.
Health is a very unfortunate reason for selling because it is usually out of the business owner’s control. Often, the sale has to be quick because of a decline in sales and a void of top decision-making due to less time being spent at the business by the owner.
Lack of operating capital / Need for growth capital If it were not for capital concerns, many business owners might never sell. There comes a point when the continued worry of funding accounts receivable, payroll, or the rent will push a business owner over the edge. A business can actually become harder to handle financially with increasing sales even though there is more money generated by the business.
To know the future of an industry, it helps if you have a crystal ball handy. If the industry is heading in a bad direction, business owners start contemplating a sale. It would be unwise to suggest that every time an industry dip or change occurs that an owner should think about selling, but a management style that has proven successful in one climate may be challenged in another.
Sales / Cash-flow
It might not be an overstatement to say that in buying and selling small businesses, “Cash flow is king.” The main scenarios when cash flow is not “king” is when the assets are the only value of the company or if a competitor is just looking at your clientele. When analyzing a business, prospective buyers and lenders key in on even the slightest slip in annual revenue and cash flow.
There are times when a business owner is approached to sell his business for an inflated value even though the business is not on the market. Many business owners will take advantage of this opportunity if the price is right. Motivation is an important issue on both sides of the equation: buyer and seller. It is important for the buyer to take a personal assessment of not only his own motivations but also that of the seller with whom he intends to work.
Buying a business is one of the most important decisions that an individual will make during their entire life.
And most likely, the purchase of a business would be larger than a purchase of a home, which most people view as the biggest investment they will need to make.
Buying a business can be as easy as providing the financing needed to procure the business. Unfortunately, many unqualified, not ready, inexperienced buyers go into the buyer pool and buy businesses without really knowing what they are buying or really looking at.
Fortunately, there are many M&A firms that can assist buyers. Businesses can range anywhere from a million-dollar business, that a corporate executive type buyer might purchase all the way up to a $100 million manufacturing company that may prefer to grow through acquisition.
Both individuals and corporations would have the opportunity to have an M&A advisor be on their side Unlike, buying a home, buying a business has no true comparables.
Example of this would be when shopping for a home, you have similar houses in the neighborhood that you can compare square footage, how many bedrooms and bathrooms etc. However, when buying a business there could be over a thousand different decisions point needed to determine the value or to determine viability or continued viability of that business.
Most Important, make sure you understand what the living breathing organism is of that business.
Smaller businesses can be more tied to the seller. These entrepreneurs can wear several hats, such as CFO, HR, Sales, Marketing etc. These people can never be replaced by an inexperienced buyer. Imperative that buyers know what the infrastructure is and continuity is included in the business.
The Vant Group is here to help guide you through the steps of buying or selling a business.
Here’s a great article on buying a business we would love to share.