Selling a business of any size can be a complicated and challenging process if you don’t have a well thought out plan and goal. This is particularly true of selling a small business, given that most of the information that’s out there is geared towards owners of larger businesses and doesn’t always apply to smaller businesses.
It’s crucial that business owners have a definitive understanding of their motives for selling before considering how to reach buyers or planning to seek valuation.
Reasons Business Owners Sell Their Business
Selling a small business is a highly personal decision influenced by many factors. Some of the most common reasons owners are driven to sell include the following:
- Personal circumstances: There comes a point when business owners are ready to work fewer hours, take a different operational role, or retire.
- Shifting focus to other priorities: Successful business owners and operators often find other business interests that they’d like to pursue. Selling their business can be a way of freeing up time and cash to pursue those interests.
- Reducing risk/taking money off the table: According to Forbes, many business owners have 80-90% of their financial assets tied up in their business, with little to no succession planning in place. Selling all or a portion of the business reduces the business owner’s net worth concentration. Diversifying where net worth is allocated reduces his/her risk profile and provides security going into retirement or another entrepreneurial venture.
- Getting resources needed to continue/manage growth: Successful small businesses often reach a stage where investments are needed to upgrade capital equipment, human capital, systems or processes to support continued growth. Business owners may not want to make these investments themselves or might not feel comfortable managing a larger, more complex business.
- Partner/Owner buyouts and recapitalizations: The respective goals of owners, partners, and operators in a business may change over time. Partner disputes and retirements can lead to partner buyouts. A long-term operator may see growth potential that a passive owner does not support. An owner may have problematic investors or cap structures that need to be dealt with to support continued growth.
Every business owner has different motivations for selling their company. In order to achieve a successful outcome, it is important for owners to envision the end result that they desire and then to plan the sale process accordingly.
How to Achieve a Successful Deal
Emotions can play a major role in selling a small business. Although the thought of selling may have crossed an owner’s mind hundreds of times, actually pursuing a transaction can elicit many positive and negative emotions. These emotions can, ultimately, dramatically impact the success of a deal.
To ensure they are maximizing the chances of achieving a successful outcome, business owners should ask themselves the following questions:
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- Do I want to sell 100% or would I prefer to retain some equity?
- Do I want to stay involved in an operational capacity? If not, do I have strong opinions about who could/should lead the business going forward?
- Do I want the company’s legacy to remain intact after the sale?
- Do I care what happens to my employees post-transaction?
- Am I willing to continue running the business if my transaction goals aren’t met?
- What are my transaction goals?
- Purchase price
- Structure and timing of the purchase
- Closing timeline
- Something else
Selling a business is a long road and it is important that business owners know exactly what they would like to accomplish at the outset of the process. The right buyer and transaction structure will significantly influence the seller’s satisfaction with a deal. Buyers will view each seller’s situation differently, so it is important for the seller or their representatives to position the opportunity accordingly. Different buyers will also have different preferred transaction structures, so it is important for sellers to consider in advance how these structures align with their own transaction goals.
Tide Rock has experience working with small business owners and leaders to structure majority sale deals that achieve both their personal and professional goals. If you are interested in learning more, give us a call today and talk to a member of our management team.
