At some point every business owner confronts the prospect of selling the business. There are many reasons why business owners sell their business. Selling a business is as much a personal decision as it is a financial decision, This article discusses 7 reasons why business owners sell. In the end, a successful sale can be quite liberating.
Business Sale = Liquidity, Diversification of Wealth, Risk Reduction and Independence
Often the majority of an owner’s wealth is tied up in the business, which is an illiquid investment. Underlying this wealth are the constant inherent risks associated with business performance. This performance can quickly change and dramatically affect the owner’s financial position.
Through a business sale an owner can:
- Realize the company’s value
- Obtain liquidity for his ownership
- Rationally allocate proceeds among a diversified set of holdings
- Eliminate all ongoing business risk
- Regain independence in terms of finances and time
Best of all, a business owner will have money to spend as desired and can obtain peace of mind and security.
7 Reasons Why Business Owners Sell
1. Retirement
Owners spend much time and invest many resources to build a successful company. Eventually, many owners want to enjoy the fruits of their labor, pursue other passions or spend more time with family.
=> A sale allows the business owner to leave the business on his own terms and deliberately move to the next stage of his life.
2. Capital and Other Operational Resources
To support continued growth, businesses need to reinvest in themselves. Sometimes, this investment can be significant in terms of dollars, managerial talent and operational resources. Often, external capital is limited, which results in the owners supporting the growth from their own pocketbooks.
=> A sale to a well financed buyer can provide the funds to finance continued growth as well as additional necessary resources. Further, there is no more enticing place for larger companies and financial groups to invest than in a smaller company with great growth potential.
3. Succession Planning
Handing the reins to a successor is often quite difficult. Especially, after having spent a number of years building the business as well as having most of one’s net worth tied up in it. Additionally, many times family members show no real interest in continuing with the business after having seen the sacrifices required. Studies by the Small Business Administration and The Wharton School at the University of Pennsylvania have shown that less than 30% of businesses end up in the hands of the second generation and less than 10% make it to the third generation.
=> A sale is a very effective method for dealing with succession issues and it provides for the continuity of the business benefiting its employees, customers, suppliers and other stakeholders.
4. Strategic Move
Various industry dynamics, such as consolidation among suppliers, customers or competitors, may result in uncertainty and increased competition. Without making substantial changes the business could become at risk.
=> A sale provides the business owner the opportunity to place the company in the hands of a buyer that is better positioned strategically and financially. It also allows the owner to step out of the situation intact.
5. Differing Goals Among Owners
In companies with multiple owners, differing visions, goals, and agendas sometimes develop. These differences can cause friction, conflict, or at a minimum, lack of clear direction and stalemate.
=> Often, a sale is a way to deliver a positive outcome that is palatable to all owners before the business suffers and loses significant value.
6. Desire to Reduce Fatigue Or Address Health Concerns
Over time as the business changes, fatigue can occur. Owners can become tired of the ongoing administrative headaches and business risks. Often, the owner’s role has changed from performing the job he enjoys, such as sales or engineering, to administration. Further, during the course of building and operating a business, sadly some owners face various health issues. These health issues may hinder their performance or are exacerbated by the responsibilities and demands of operating the business.
=> A sale allows a business owner to pass along administrative headaches to a new buyer. A sale reduces the stresses brought on by the business and can free the owner to refocus effort on what he enjoys or on his personal health and welfare.
7. Estate and Tax Planning
Valuing a private business is a difficult proposition, especially after the death of the owner. Without proper estate planning, heirs may face a large tax bill without having the financial resources to pay it. Also, heirs may face other familial strains as they determine the best course of action for the company’s future and the inheritance.
=> By selling as part of the estate plan, a business owner provides for his heirs and reduces the burdens and potential for family conflicts. Most importantly, the business owner will have received a much higher value for the company as compared to a quick sale or liquidation after death.
