This month’s article addresses reasons why businesses sell and how value can be generated by planning ahead and consulting with advisors. Many buyers become fixated on the reason that a business is for sale. I suspect that is because most people look for bargains such as buying a business due to a sudden health event relating to the existing owner.
Similarly, there is a sense of security if a business provided income to an owner that was retiring after twenty-plus years of owning the business. Within the M & A advisory community, we often discuss how our industry is event-driven by factors such as a divorce, death, disability, relocation, etc.
Although the reason for sale is a fact to be considered among many others, we have also encountered numerous situations where a serial entrepreneur acquires a business, perhaps a small company with a straight forward concept, builds it up, sells it, and then acquires another, perhaps larger, more complex company.
I am reminded of a buyer, Ted, that we worked with several years ago. Ted would look for a business that he would grade out at 55 or 65. He would buy the company, improve it to a grade of about 85, sell it, and look for another business with a 55 or 65 grade and start the process over again. Ted’s theory was that it was fairly easy to increase the business from a low grade to 85, but that it was more time-consuming and challenging to take a business from a grade of 85 to 95. He did that on multiple occasions with us before relocating out of our market area.
Lessons from 2017: Planning to Maximize Profits
According to quarterly Market Pulse data, Retirement and Burnout were consistently seen in most segments throughout 2017 as the top reasons for selling a business. Other reasons reported throughout the year were New Opportunities, Recapitalization, Family Issues, Health, and Relocation.
The following chart takes into consideration the data from all four 2017 quarterly reports:
The data also shows that, even though the events of retirement and burnout are commonly seen as top reasons for selling a business, it is also very common to see that these predictable events are often not planned for. The main goal of planning the exit of a business is to better position yourself to receive the greatest amount of profit and to “not leave money on the table”. Business owners who plan often find that there are some easily implemented changes that can be made to substantially raise the value of their business.
Although it does seem more logical to plan for retirement than it does to plan for burnout, the act of planning can help you avoid burnout. Just as entrepreneurs are often driven in the beginning stages of owning a business by the newness of the adventure, the goals that need to be reached, and the benchmarks that need to be achieved, planning can help to put these things back into the business and revitalize you for that final push in maximizing the value of what you have built.
It is interesting to see that, as the value of the business increases, the tendency to plan also increases. This may be due to larger businesses providing more time for the owner to work on the business, as opposed to in the business, and may also be directly tied to the skill level of the owner. Nonetheless, any business owner can take advantage of this knowledge and start to plan now.
If you think that you may be three to five years from selling your business, the time to start planning is now. For help getting started, contact The FBB Group. Our consultations are confidential and without obligation.
The majority of our business is derived from referrals. Please consider referring our services if you encounter a situation involving the potential purchase or sale of a business.
Ronald V. Chernak
Inspiring business relationships since 1982!
(originally posted in the May 2018 newsletter)