Friday, May 4, 2012

Do I really want to sell? The four reasons people sell their businesses.

Written by Neil Ackroyd






In my experience there are four reasons why people sell businesses. Every rule has its exception, however, it is very important to consider whether you fit one of these reasons before commencing a process. The cost and disruption to a business of an abortive sale process is immeasurable and can be avoided to a certain extent by considering these four factors up front. I would certainly be exceptionally reluctant to accept a client who does not fit into one or more of these categories for the client’s sake as well as the sake of my team and my bottom line.

I believe that there are only 4 reasons that people complete transactions when selling. 
a) Retirement/completing a plan
b) A fundamental shift in your life priorities
c) The business not being fun anymore/outgrowing your skill set
d) An exceptional cash offer or exit opportunity

Looking at these reasons individually;

Retirement/completing a plan
Many owner managers have a long term retirement plan or exit plan. The commonality of these two areas is that they both give you a clear plan for what you are going to do after the sale of the business. This is the key aspect to whether this is a reason that makes sense for you. If you have a plan that involves sitting on the beach, playing golf or even starting a business in another area then you are onto a winner. Any project to sell a business where you have nothing else to do afterwards should be considered carefully.

A fundamental shift in your life priorities
I have had many clients over the years whose priorities have shifted dramatically. Sadly this often results from a change in life circumstances. Possibly a family or personal illness or tragedy. However, it can also come from good news like the birth of a child or grandchild. This is quite often a stressful situation also because after years of enjoying running a business, and it in fact being a driving force in an individual’s life, it suddenly becomes a place that is stopping them doing what they want, however, they feel a responsibility to be there for staff or to safeguard assets. In this circumstance the sale of the business is an excellent route to consider.

The business not being fun anymore/outgrowing your skill set
The business not being fun anymore or the business outgrowing the skill set of the founder is really quite often the same reason. The first way of saying it is just a way to preserve ego. However, there really is no need for that and absolutely no shame in that reason. The skill set required to start and grow a business to the critical mass of an SME is an excellent one to have. The skill set to grow an SME to the next stage is also an excellent skill set to have. The individuals having these skill sets have very different motivations, traits and behaviours. In my experience it is very rare indeed for an entrepreneur to be able to become a professional CEO and even rarer for a professional CEO to have the creativity and dynamism to be able to be an entrepreneur. These are just facts of life and it is a powerful individual who is able to admit that the next stage of growth is not consistent with their skill set. It is often noticeable that, in this situation, the owner manager is feeling constricted, bored and often confused. This is a very common problem. Although selling is not the only solution to this problem, in my experience more owner managers are capable of becoming professional CEO’s than an effective Chairperson managing a professional CEO (but an entire new website could be dedicated to that as a topic). 

An exceptional cash offer or exit opportunity
This last reason needs little explanation. Reasonably commonly there are short lived and extreme market conditions in niche markets that can offer exceptional exit opportunities. These are areas where you see multiples well into double digits being offered. Biotech was like this prior to the credit crunch and in certain areas still after, telecoms re-sellers in the UK are experiencing such market dynamics at the moment. Clinical trials supply chain companies have had many years of exceptional conditions. If you own a business in a market experiencing such a distortion or if your company very specifically fills a niche desire for one other business then you should consider the deal. There is nothing more soul destroying than saying no to a deal and then working for another 10 years and selling when you want to, and your ultimate exit plus the ten years of profit still being less than the price you said no to (and yes I have seen this happen and heard of it happening many times). However, the other note of caution I would add is similar to the retirement reason. Even if you still sell for a stellar price make sure that you have some sort of plan of what you are going to do next.

The common theme in the first 3 reasons is that the owner manager wants out and is trapped. This is a unsatisfactory position to be in and is unique to the owner manager. A corporate manager or employee will typically have a 3, 6 or 12 month notice period they cannot even be held to this provided they don’t want to move to a competitor. Therefore they can walk up to their boss and hand in their keys and passes. The business will go on without them and no-one will blink. The owner manager is rarely in this situation and often feels a deep responsibility to staff and the business for the years that have gone before. Therefore the decision to sell (in the first 3 reasons) is driven mostly in my experience by a need for freedom and the continuation of the business rather than an overt desire to maximize price or make themselves rich; indeed most of them are already rich.

In conclusion, if you don’t fit into one or more of the top 4 reasons for selling I would think very carefully about what you are doing and why. When considering whether to work with a prospective client our single most important criteria is the likelihood of a successful legal completion. A prospective client doesn’t fit into one of the top four areas is far less likely to complete a deal. I have learnt more than once that such a client can realise mid process that they don’t really want to sell, this a extremely bad for the client and the business and it is very worthwhile considering these points very early on.