 Each business owner looking to sell his/her business has a different reason for the sale. Yet, some common themes seem to come up. Below we capture 8 scenarios we encounter time and again from our seller clients. More importantly – we explore how they might be perceived from the investor / buyer side of the table!
Reason 1: No Succession Plan.
What Buyers See: Opportunity, with Risk
Overview:
Clear Rock estimates that in excess of 75% of small businesses do not have any succession plan in place. For very small “mom and pop” businesses, this number often runs higher. Business owners frequently make the mistake of thinking that a daughter or son will eventually take the business over (just like they did) only to find that their child is yearning for a career in Corporate America.
The result is (sometimes quite predictably) that a business is left with an owner that wants to retire, but is unable to easily exit the business. They have become so integral to every aspect of their business – from being the CEO to book keeping to sales all the way through operations – that to leave would mean the business would collapse.
Way out:
As a business owner, how can you protect yourself from this problem? We look at several key pieces.
- Have a succession plan
- Make sure you work “on the business, not in the business”
- Don’t be afraid to ‘institutionalize’ your business however small it is. Setting standard operating procedures does not necessarily mean it will come with a huge price tag
- Be prepared to address this in any transition
 Reason 2: Burnout.
What Buyers See: Blood in the Water
Overview:
How long have you been running your business? How many hours did you work last week? Was last night yet another night you went to bed mulling over a business predicament? It’s often the case with small business owners that they have been in the same line of business, doing the same tasks day in and day out for years on end. They are so ingrained in the business that they routinely fail to observe or cure the ailments eating up their business. They work long, grueling hours, and it eventually takes a toll on the other aspects of their life. And one day, they come to a realization that they do not want to do this anymore. This so called “burn-out” is a leading cause for small business owners to sell their business.
Way out:
There are only two solid ways to cope with burnout.
- "Re-invent” Your Role
- Head for the Door
The most obvious (and least permanent) method is to “Re-invent Your Role;” that is, change both the business and your role in it. This might include hiring in management so that you can step back from the business, or even altering your line of business so that you have a fresh experience. Boredom and the sense of a never ending stream of repeat tasks is often what leads to Burnout; removing this repetition can often help. Selling the business is of course an option as well, albeit a bell that cannot be “un-rung” once you have executed. We always want to make sure when someone is selling their business that they have put plenty of thought into their decision and are not going to experience “seller’s remorse” when they are half way through the process.
Reason 3: Exceeding Working Capital Requirements.
What Buyers See: Opportunity - a Solid Deal
Overview:
Is your business growing quickly? Or is it growing at all? If so, your business is consuming working capital. You are likely forced to dump profits back into the business in order to be able to fund operations and inventory. This is not necessarily bad, but it is a situation that bears deep examination as well as planning.
Way out:
In general, there are four basic methods to fund increasing working capital:
- Fund through the business’ profits
- Optimize the cost and asset structure. Divert funds from cost savings or asset sales to working capital requirements
- Use of external resources (i.e. a line of credit, factoring, etc.)
- Raise (or sell) equity in the business
Many owners choose some form of raising (or selling) equity in the business because they are either reluctant to cut back on out of pocket profit in order to fund growth, unable to cut back on the costs, or are leery of incurring further leverage through increased debt. Don’t worry, there can be a lucid rationale for any of the above choices, but certainly a key consideration in many business sales is pressure on working capital.
Reason 4: Health, Divorce, Death in the family or Other Personal Reasons.
What Buyers See: Opportunity, With Risk
Overview:
The Big Three, as it were. Given that in many cases a small business owner’s largest asset is their business, such personal reasons can often force a liquidation of some part of that asset; facing a call on a loan or a bankruptcy. This can often be an unfortunate, if not devastating, series of circumstances, especially when the business is underinsured, there is no succession plan, and the business is not in “proper shape” for a sale.
Way out:
PLAN, PLAN, PLAN : No business is too small for proactive crisis and disaster management. In fact, the smaller a business is , the more personal a disaster is felt.
Reason 5: Your Portfolio Only Has One Asset!
What Buyers See: Opportunity
Overview:
Clear Rock estimates that in well over 50% of cases, a small business owner’s only significant asset is their company. Thus, as a business owner starts to feel the pinch from any of the other reasons listed above, the pressure relief valve is often to look towards selling the business at a fire sale value.
Way out:
Of course, every financial adviser would tell you that diversification is the number one way to mitigate risk in your portfolio. Although as a small business owner, it makes sense to concentrate your limited resources on your core business, it is never a bad idea to keep an eye to solid opportunities to diversify your risks.
Reason 6: Competitive Pressure.
What Buyers See: Downside Exposure, Risk
Overview:
Perhaps one of the worst times to try and sell a business is when you are feeling overwhelmed by pressures in the market place. It is often the case that we will field inquires from a business owner that is running scared by a change in the market place- be it a new competitor, a larger company entering their niche, a change in real estate or neighborhood realities, losing their biggest customer- and the list goes on.
Way out:
Again, this highlights the need for careful diversification. You can well imagine that it will be hard to derive much premium from your business if there is a new systemic problem likely to impact cash flows of a new buyer. (And don’t even think about not mentioning the Big Issue to a buyer, as you will surely open yourself up to a potential lawsuit or at least a loss of trust and credibility in the eyes of a potential buyer).
Reason 7: Investor (Or Lender) Pressure.
What Buyers See: Opportunity
Overview:
It is sometimes the case that investors (or perhaps lenders) get restless. Investors typically start to do so as they:
- See sub-par returns
- Expect greater growth
- Need an Exit from their investment
Way out:
There are specific methods for dealing with each of these scenarios. Nonetheless, when the time comes (or even before agreeing to the terms of the actual investment or loan) , these are issues that need to be discussed and dealt with swiftly, so as to insure continued smooth operations.
Reason 8: You Receive an Offer (Inquiry) from a Peer.
What Buyers See: No Impact (Smart Buyers know this is not a reason for Pressure)
Overview:
These types of propositions spur a good number of inquiries into our office; as is often the case, a business owner has not thought much about selling their business until they receive an offer. In many cases the owner will want to entertain the offer, but will not really know how to do so. (We always refer them to this article: “I have an Offer”).
Way out:
Of course, it makes sense to consider. But as the referenced article notes, your likelihood of success from any single buyer is in the single digit percentages at best. And of course it is important to weigh disclosure of confidential information when you are making your decision as to how to proceed.
Conclusions
You may have noticed a common thread throughout the above eight points: planning and forethought is the most compelling solution to most considerations when it comes exiting your business. Whether you are in a dead end without an heir-apparent, or you are just burned out, the best advice that we can give is to approach the exit to your business with a great deal of forethought and planning. |
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