Determining Owner Commitment to Selling a Business
As an owner, deciding to sell your business can be a difficult and time-consuming experience, and one that requires proper planning and awareness of marketability. When evaluating a potential business for purchase, it is important to understand the owner’s commitment to the sale. Many owners have prepared from the early stages of the life of the business and have developed a detailed exit plan by the time they are ready to retire. In other cases, the owners may find themselves selling before they are entirely prepared, either because of burnout or divorce for example.
According to the International Business Brokers Association (IBBA) when it comes to the buying or selling of a business, 49% of the transactions did not make it to closing in Q1/2018. When evaluating the owner’s commitment and potential to close it often comes down to the owner’s motivation to sell as well as the amount of planning the owner has put into developing a successful exit strategy. Determining an owner’s motivation to sell is an important step in the initial due diligence process as it will sometimes shed some light on the likelihood that the deal will go through.
Below are common reasons owners decide to sell a business:
Retirement: The International Business Brokers Association (IBBA) lists retirement as the number one reason business owners decide to sell their business for listings in the <$500K-$5Mil range. Adding to this already common reason, there is a major uptick in the amount of small businesses being put on the market with the massive influx of baby boomer business owners reaching retirement age. According to the California Association of Business Brokers, retiring Boomer business owners will sell or donate $10 trillion worth of assets over the next 20 years. This equates to a total of over 12 million privately owned businesses. Business sales due to retirement are more often planned years in advance and as a result the business is better prepared for sale. The owner is more informed of the steps in the process, leading to a higher percentage of closed listings.
Burnout: The IBBA lists burnout as the number one reason owners sell their listings in the $5Mil – $50Mil range. Burnout can happen to all of us, at any level of the spectrum, from front line employees all the way up to the owners. At some point in the owner’s tenure they may decide they no longer have the drive they used to when it comes to running or overseeing their business. Often business owners have dedicated many years, resources, and energy into building a successful company. Once they have reached a point where they no longer have this same focus or drive it may become time to sell. The business may have plenty of potential and just need a fresh perspective that can help to take it to the next level. If this occurs suddenly without much planning it could lead to difficulties when it comes time to sell as the owner will not have developed a proper exit strategy that could lead to unrealistic expectations.
Divorce: Divorce can complicate things tremendously when it comes to business ownership. It is common knowledge that over 50% of all marriages in the US end in a divorce, and in places like California, most spouses are entitled to 50% of their partners assets, which includes the business. Since seeing eye to eye on the future of the company will usually be unlikely, owners may find themselves having to make a difficult decision to sell. In many cases divorce may leave owners less prepared for sale and leave the business in an undesirable position when a business broker is attempting to manage the sale. There are steps to take to try to salvage the business when this occurs, and there are ways to help avoid potential issues from occurring when first buying a business like outlining assets in prenuptial agreements and defined partnership agreements. However, in many cases these steps have not taken place and there are many added difficulties that may lead to an unsuccessful close.
Illness: Whether it is the owner that is affected directly or members of their family, illness is another common reason owners decide to sell their company. The difficult reality of illness is that it is often unexpected and there may be little time to prepare the business for sale, or optimize the sale price. Too often owners are forced to sell before they have had a chance to streamline the business and operational performance, let alone their finances and tax returns. This urgency could cause the owner to potentially rush to the decision to sell and when they dive in deeper with the advisor they may be disappointed in the outcome of the evaluation.
Relocation/Lifestyle Change: Business owners are most successful when managing the company at the same location they live. Just as with any other job there are external factors that could cause the owner to need to move to another state. Often rather than attempt to continue to run the company remotely, they will put the business up for sale and potentially buy another business at the new location. Like retirement, in this case owners often have enough lead time to prepare the business for sale in advance of the move, helping them to better align themselves with realistic expectations of the sale.
Other notable reasons for sale are:
Poor Performance: Often owners have held on to a struggling business long enough. They have put in years of hard work only to barely make ends meet and have finally had all they can take. They will be looking to unload the company in hopes of salvaging some gains in the process but may not have a realistic view of the value or transition requirements in mind.
Target EBITDA: Owners may have hit their target EBITDA. They may have had a proper exit strategy in place and reached their target. In this case they will have planned effectively and the chances of closing the sale are greater.
Industry Changes: Sellers may have information that is already publicly known, or may be internal that predicts a negative shift in their industry. Industry changes may also create additional risk and as a result could lead to a lower sales price than anticipated.
Partner Disputes: There may come a time when partners don’t see eye to eye, or have the same vision for the company and choose to part ways. Settling on a realistic sales solution may be difficult in these cases particularly if a prior plan was not in place.
Financial Reasons: Business owners may make poor financial decisions unrelated to the business. Regardless of whether the business is thriving or not they will need to liquidate to cover these debts and hope the sale of the business will be the solution.
Top Reasons Owners Sell Their Businesses
|Deal Size||#1 Reason||#2 Reason|
|<$500K||Retirement 34%||Burnout 24%|
|$500K – $1MM||Retirement 44%||Burnout 20%|
|$1MM – $2MM||Retirement 61%||New Opportunity 18%|
|$2MM – $5MM||Retirement 55%||(Burnout, Family, Other) 10%|
|$5MM – $50MM||Burnout 47%||Recapitalization 16%|
*Data obtained from IBBA Q1/2018 Quarterly Market Pulse Survey
From the reasons mentioned above it is apparent that some owners are more prepared than others to sell a company. There are many cases such as relocation or retirement where the owner has an exit strategy in place, has the target sale price in mind, and knows what EBITDA they need to reach to get there. They have also had time to streamline the management of the business and decrease dependence on themselves to continue to run the company, thus reducing the required transition time for the new owners. However, other cases exist where the decision to sell has come more abruptly and the owner did not implement a clear strategy or path earlier on. This lack of planning increases the odds that the seller will not have an accurate idea of the business sales process.