At some point every business owner confronts the prospect of selling the business. Selling a business is as much a personal decision as it is a financial decision and the decision making process can be quite emotional. A transaction advisor, such as an investment banker, can provide an unemotional, objective perspective, which can be quite beneficial. In the end a successful sale can be quite liberating. There are many reasons for selling a business.
Liquidity and Diversification of Wealth
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, which can change and dramatically affect the owner’s financial position. Through a sale you can realize the company’s value, obtain liquidity, rationally allocate proceeds among a diversified set of holdings and eliminate all ongoing business risk. Best of all, you will have money to spend as desired and can obtain peace of mind and security with a more balanced portfolio.
After spending so much time and investing so many resources to build a successful company, many owners want to enjoy the fruits of their labor, pursue other passions or spend more time with family. A sale allows you to leave the business on your own terms and deliberately move to the next stage of your life.
Capital and Other Operational Resources
To support continued growth, businesses need to reinvest in themselves, and 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.
Handing the reins to a successor is often quite difficult 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.
Various industry dynamics, such as consolidation among suppliers, customer or competitors, may result in uncertainty and increased competition. Without making substantial changes the business could become at risk. A sale provides you the opportunity to place the company in the hands of a buyer that is better positioned strategically and financially and allows you to step out of the situation intact.
Differing Goals Among Owners
In companies with multiple owners, differing goals and visions sometimes develop, which 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.
Desire to Reduce Fatigue Or Address Health Concerns
Over time as the business changes, fatigue can occur in which the owner becomes 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 that hinder their performance or that are exacerbated by the responsibilities and demands of operating their business. A sale allows you to pass along your administrative headaches to a new buyer, reduce the stresses brought on by the business and can free you to refocus your effort on what you enjoy or on your personal health and welfare.
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. Likewise, heirs may face other familial strains as they determine the best course of action with regard to the company’s future and the inheritance. By selling as part of the estate plan, you provide for your heirs and reduce the burdens and potential for family conflicts. Most importantly, you will have received a much higher value for the company as compared to a quick sale or liquidation after death.