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.
Challenge: Reporting Financials / Partner Disputes
Due to partnership conflicts, our client went from being a passive minority investor to a majority active owner in an industry with limited knowledge in a short period of time.
To make matters worse, late paying customers and a non-traditional accounting approach made year-end financials appear drastically different from the health of the business which caused great pause for lenders. Given a majority of deals are financed through some type of third-party financing and the financial limitations of the company, we knew the buyer pool could be limited which could increase the time to close. The seller was anxious to sell quickly so we had to balance the seller, the business hurdles, and marketplace.
Approach: Expanded Deal Structure / Demonstrated Value
- Established Expectations. Because of the late-paying customer and non-traditional accounting methods, we understood the lending climate would be limited at best if not non-existence.
- For this reason, we educated the seller a significant amount of seller financing would be involved. We provided an estimate of value as well as expected deal structure before engagement ensuring the sellers would be open to all types of offers and the lay foundation a full-price all-cash offer would be the exception and not the norm.
- Told the story. While every buyer could see the financials were on a decline, the company still have some great assets. The company has some great accounts, focused on a very niche industry within the IT sector and had multiple channels of revenue. The core of the company was still intact and with a focused growth strategy, a new buyer could easily return the company to its glory days.
- Focus marketing search. Given the issues of the company, we understood a generic buyer probably won’t be the best buyer to target. We either need a strategic partner who understood the assets of the company and could create synergies or an IT professional who wanted to run his own operation.
- Received 3 competing offers | Closed in 4 ½ months | Seller received 94% of asking price.
- An IT professional purchased the company using a ROBS (Rollover for Business Startups).
- The purchase price consists of equity from the buyer and a seller note.
- Since no outside banks were used, we will able to have a quick close and save time.
There are key steps involved in a business transfer. Each step will vary in its complexity and size; having knowledge of the complete process will help to keep you on a path to closing successfully.
Step 1: Business owner deciding to sell his or her business
Sounds simple, doesn’t it? However, unless a business owner is truly deciding to sell, the process should not begin. Scenarios can occur daily for many business owners to cause them to ponder the idea of selling. Often, a more cataclysmic event needs to occur to push an owner over the edge into a selling mode. A business owner must come to a definitive decision before he begins this process. If not, it could be a waste of time and money.
Step 2: Determining the market value of a business
Before placing a business on the market, a value or range of value must be established so that you have a basis for what and how to negotiate. This is one of the most critical steps and should be handled with special attention. There are many different people that you can turn to in determining a business’s market value, which includes but is not limited to CPA, attorney, valuation company, self, and a business broker. Depending on who sets a value on a company, the pricing range can be wide.
Step 3: Gather pertinent information into a marketing package
The resulting marketing package created is the first interaction a prospective buyer will have with a business; therefore, the old adage, “You can only make a first impression once” could not be more appropriate. The marketing package should include at a minimum, information about financials, employees, assets, and the operation of the business. A business analysis must be performed to explain the strategic plan, financial statements, strengths, and opportunities.
Step 4: Marketing the business
Potential buyers need to be approached in order to be made aware of your business. There are two basic avenues of marketing a business: hiring a business broker or selling it yourself. In general, there are many methods that either party can use to reach the market: The Internet, newspaper, trade associations, and others. The most important factor is that a game plan is absolutely necessary to ensure that the greatest numbers of qualified buyers are contacted regarding the sale.
Step 5: Identify potential buyers
The key is determining who they are if they have the necessary funding and if they are a good fit. A brief list of potential buyers includes corporate executives, customers, suppliers, competitors, investment groups, and employees. It is imperative not only to identify the potential buyers but also to ensure they are financially capable of purchasing your business.
There are a number of pre-qualification methods that can be used to ensure a prospective buyer is financially secure. All potential buyers should sign a confidentiality agreement and provide verification of their financial ability to complete the transaction.
Step 6: Arrange meetings with buyer and seller
The first meeting between a buyer and seller is similar to a first date. Each side is wondering if the other likes them. The meetings with a seller are of paramount importance in a buyer’s final decision. You should always be forthright in your answers and give quick responses to inquiries on updated information.
Step 7: Offer to purchase/letter of Intent
The two most utilized legal vehicles used for formal contracts are a Letter of Intent and an Offer to Purchase. The main difference between the two documents is the level of commitment.
A Letter of Intent is a document stating intent by a buyer to buy a business. An Offer to Purchase is more detailed and binding. A Letter of Intent is usually followed by an Offer to Purchase. In some instances, a further step is taken with the preparation of a Definitive Agreement, which is a more formal version of an Offer to Purchase. Be advised that the documents are merely tools to ultimately get to the closing though they should include as many detailed “deal points” as possible.
Step 8: Negotiating and deal structure
There are three primary decisions: accept, decline, or negotiate. The sale price is only one of several negotiation points on a contract. Variables such as payment terms, the length of training, consulting agreement, and allocation of sale price are just a few items that can be leveraged to make a deal more favorable. The most important aspect of a business transfer is what a seller ultimately receives after the transaction has been completed.
Step 9: Due diligence
The beginning is mainly taking the time to learn more about the other person, the business, and to determine if both sides are compatible. Due diligence is performed by the buyer to ensure that the books, records, and operation of a business are as they have been portrayed. If it is a solid company, then the due diligence should be effortless, but if there are problems with the business, then due diligence could take longer and be more complicated. Due diligence can last between 7 and 45 days with the average length being around 21 days. The size, type, and complexity of a business, as well as the style of the buyer all, affect the amount of time due diligence will take.
Step 10: Closing
Closing a deal is the finest part of the whole process! It’s time to get paid. Prior to closing, the Offer to Purchase or Definitive Agreement is submitted to an escrow company or closing attorney, so that due diligence can be performed. The closing agent’s responsibilities vary from agent to agent, but at a minimum should include: lien and title search, real estate and personal tax pro-rations on the business, preparation of closing documents, and disbursement of funds to the seller.
You have work to do now – Seven steps to getting the price that you want.
The required steps to be ready to sell a business outlined in this article was excellent! Great attributes are put into place during the growth stage of a company, however, some of those things may have a negative effect on the actual the sale price. For example, overspending on hiring, advertising in anticipation of growth and then hitting a good a projection but missing the overall projection, causing the net income to be lower which would cause the value to be to lower.
General preparation for selling a company is something that must be done many years in advance, as the key is nailing down those numbers. Ensuring that those figures are as high as possible will maximize your sale price. At the end of the day, a business is sold at a multiple of how much profit it makes. Read more
The Vant Group is here to help guide you through the steps of selling a company and make it a successful transaction!