One of the things we always do when we take on a new client is to try to understand why they are thinking about selling their business.
This is important for a whole host of reasons.
From a business point of view, it helps us to understand how serious they are about selling. It also helps us position the business for sale. Prospective buyers usually want to have a very good understanding of why a business owner is selling, too. Are they selling because they see some unavoidable business downturn on the horizon? Are they selling because business is just becoming too hard, such as its becoming too difficult to adequately staff the business? Those are red flags to a potential buyer.
On the other hand, there are all sorts of reasons to sell a business that make sense to everyone. One of the obvious ones is that the seller is planning for retirement. Another common one is that the seller wants to “take some chips off the table” and reduce risk by diversifying his or her portfolio. Other reasons that make a lot of sense are health issues or family issues. There are many others.
Recently, I sat down with a new client to better understand his business and objectives. I asked him the question, “Why are you selling your business?” His answer was very thought provoking.
He told me that he had a brother who had also been a business owner. His brother’s business involved manufacturing for the building industry. At its peak, his
brother’s business had been almost wildly successful, generating substantial cash flows –far higher than those being generated by my new client’s company. He also had some desirable intellectual property – some important patents. He had been approached several times about selling his company, but it just didn’t make sense to him. The cash flow he was generating was too good to even seriously consider selling.
Then the recession hit, and the impact on this man’s business was pretty dramatic. Since his business was construction-related, the drop off in revenues was even more acute than in companies in general. Eventually, the decision to close was inevitable. The auction of the equipment of a business that only recently had generated over $1 million in annual cash flow produced less than $200,000.
My client looked at me and said, “You ask me why I am thinking about selling now. It’s simple. I don’t want that to happen to me.”
His comment sank in for a moment and then I thought, “Wow, he’s really thought this through, and that makes a lot of sense.” He didn’t want to wait too long to address selling his business. He wanted to be able to sell his business on his terms.
You really can wait too long. His brother did. Many business owners want to wait until business conditions improve. Others are too focused on the day-to-day challenges of running a business alongside life’s other challenges to even think about it.
A smart business owner contemplating the possible sale of his business takes into account several questions:
- What is my business worth now?
- What can I do to improve the value of my business?
- What risks are there that might diminish the value of my business between now and the time I might sell my business?
The answers to those questions should be pretty thought-provoking. Thinking about these and others should help a business owner to answer the question as to when the time is right to start thinking about selling his or her business.