Business Brokers BC Blog

Decisions all Business Owners will have to face

Tuesday, August 17th, 2010

Often Business Owners struggle with their decision whether to sell their business or not.  The reasons for this are many not least of which is the fact the business owner has spent many of the past years on building their business and as a result the company becomes part of their identity. Even when they are not at work, they are constantly working, thinking and planning. The business is part of the fabric of their lives and if they sell, they feel that they are leaving much more than a job.

Sometimes they ignore advice, as well as personal and practical situations and/or market dynamics that are staring them in the face that foretell difficult times ahead. What many are not aware of is that these difficult times can often result in a significant drop in the value of the business.

Nevertheless there are signs that business owners must be aware of which might indicate that it is time for them to seriously consider a plan to exit their business, below I have mentioned some of the more common ones:

Their kids are not interested or are not capable of running the business. Oftentimes an Owners’ children may not be interested or capable of running the business in the same way that the father/mother have done.  They simply do not have the same drive, ambition or interest.  In this case perhaps a better legacy that an Owner can leave to their kids is to convert their company into a diversified portfolio of financial assets that may be far less risky than turning the company over to inexperienced managers.

Owner is faced with the need to make a major capital investment into the business late in their working life in order for the company to maintain its competitive position. Maybe this should be a time that they should be thinking about diversifying assets, not concentrating them even further in the business.  In terms of a simple payback analysis, does the payback extend beyond an expected exit date? Maybe it is time to bring in an equity partner, an industry buyer with the management depth, infrastructure, or distribution network to protect that investment. Let a new owner amortize the investment.

The Owner’s enthusiasm to compete and grow the business is not burning as brightly as it once did. If businesses are not growing, they are most likely contracting. A downward sales trend makes the task of selling a business much more difficult as potential buyers fear that this is a sign that the viability of the business itself is under question.

They lose a major client or a key employee. That can be a real blow to a business. The owner, by nature, is optimistic and believes that the lost business will soon be replaced but if he does not immediately reduce expenses to match this new sales level it can lead to problems and if they do cut it may not be fast enough or deep enough. Therefore maybe it is time to seek a buyer before the company’s value is impaired as profits erode.

A large competitor is taking market share away from them at an accelerating pace. The news is not likely to get better and is a trend that is difficult to reverse.  This should be a wake up call to the Owner to get out.

Their legacy systems, production capabilities, or competitive advantage has been “leap-frogged” by a smaller, nimble, entrepreneurial firm. This happens often and can cause an erosion of their customer base. Inertia may sustain them for a while, but eventually they will begin to experience customer defections. They can restructure, acquire or sell. If they decide to sell, they should do so before losing too many clients.

A major company in a related industry just acquired a direct competitor. Watch out, they did not make this acquisition to maintain status quo. They want to grow their market share. They will be coming after all potential clients. The good news is that as a defensive measure, one or more of their competitors may be compelled to make a similar acquisition. It may be best to be aggressively ahead of the curve and get acquired.

They have a health scare and have decided to focus on family or doing all the things that time devoted to the business has prevented them from doing. They are thinking of all the sacrifices they have made. Their list of goals is changing from financial in nature to family, friends, travel, experiences etc. They might want to listen to their heart at this time.

The market to sell is hot and they decide to take some chips off the table for asset diversification. They may be thinking of retiring in four years, but a consolidation is occurring in their industry and valuations are up 20%. Why not sell at the top and sign a four-year employment or consulting contract.

They want to exit in an orderly fashion and from a position of strength as they have always intended. They should be reminded of the competitive forces in the market and the relative strength or weakness in valuation multiples. They need to know how to prepare their business to be attractive to a strategic buyer. They need to hire a good Intermediary firm to present them confidentially to the most likely buyers. When several recognize their value and show interest, they need help in getting a little competitive bidding going. If done right, their transaction value will rise and their terms will improve. When they pull the trigger and complete the sale…they will be able to say with confidence “Mission Accomplished”.

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