Why Are You Selling Your Business?
Small business owners have many different reasons for selling their companies. For some, a business sale is the logical conclusion of a long and successful entrepreneurial career. But for the others, the sale may be motivated by a personal or family crisis, a new business opportunity or an unexpected change in business conditions.
It turns out that these motivations play a very important role in the sales process. That's because business sales are strategic transactions, and the shape and outcome of your sale will inevitably be influenced by your sale motivations.
To establish a solid foundation for a successful business exit, your first step is to identify the factors that have led you to sell your company. In fact, when you meet with an experienced business broker, it's typically the first question they'll ask.
Your answer must be honest, sincere, and thoughtful. Indeed, as I will cover shortly, if you don't fully understand why you are selling your company, you're likely to make costly mistakes as you move forward in the selling process.
Define Sale Motivations and Preferred Outcomes
Nearly all sellers are interested in receiving the best possible price for their businesses. But obtaining a high sales price is not the only priority when selling a company. In most cases, sellers are also concerned about the timing of the sale, the future health of their company, and how the business sale will impact their lives going forward.
What's critically important to understand is that it is a seller's motivations to exit a business that define the relative importance of these outcomes.
For example, it's not uncommon for some business owners to want a fast sale with an immediate departure from the company. Motivations that drive a desire for a rapid exit include owner burnout, the death or acute illness of a business owner or leader, or ownership's awareness that significant effort lies ahead to ensure the company's future prospects due to anticipated changes in the market. A seller with these motivations may be willing to sell to the first qualified buyer who comes along. They may also be willing to accept a modest sale price, rather than holding out for a higher offer.
Other sellers, in contrast, take a much slower pace to the exit door. They have no urgent need to sell and they may be motivated to remain involved with the company over the long-term. Their primary motivation may be simply to take some money off the table for future retirement, securing a payoff on the blood, sweat and tears they've put into building up their company over the years.
Motivated to stay involved in the company and to see their legacy remain strong, such sellers may still be willing to work as a consultant to the new owner for a period of time after the sale. Moreover, knowing that they will stay involved in the company, these patient sellers are typically more willing to finance a portion of the sale price. That's a markedly different approach than that of impatient sellers who want to quickly sever ties with the business and, thus, usually prefer an all-cash payoff at closing...even if it means a lower overall price.
As you've read through the scenarios above, you may have noticed something. Sellers' motivations for selling have a direct impact on their expectations for the sale and on their desired terms for the transaction. This fact is not lost on prospective buyers who are quick, and wise, to ask "Why is the owner selling?"--the answer, assuming it's honest, is a key piece of intelligence that influences how the buyer will structure their offer.
The key takeaway here is that when you are considering your preferred sale outcomes, it's important to address your motivations and assess their implications across several key sale transaction attributes:
- Desired sale price relative to the marketplace
- Preferred sale timeline
- Involvement after the sale (immediate departure vs. ongoing involvement)
- Seller-financing vs. all-cash payoff
- Disruption to clients and employees
By carefully defining your motivations and listing the outcomes that are important to you, you can help your business broker define the variables that will shape your sale strategy. Based on their experience from shepherding numerous deals across the finish line, your business broker will also help further educate you on how your motivations will impact your sales strategy and likely sales outcome.
Identifying Potential Conflicts
Unfortunately, after completing the exercise outlined above, most sellers discover that one or more of their motivations and desired sales outcomes are in conflict. For example, although it would be nice to achieve an immediate, all-cash sale at a high selling price, it's unlikely that the marketplace will enable both of those desired outcomes.
Any number of conflicting priorities can potentially derail the success of your business sale. But some of the most common conflicts include:
- Fast Sale and a High Price with an All-Cash Payoff. Unless the business has superstar status, a quick sale often requires a discounted sale price and seller financing, especially since third-party financing takes time to secure and almost always slows down the process. Sensing a seller's urgency, buyers are apt to offer a lower price and be more aggressive on the deal's terms and conditions.
- High Price and an Immediate Departure. When the seller wants to immediately depart the company, it can raise flags with buyers and lead them to make a lower offer. To secure a high sale price, sellers have to be prepared to help the buyer during the transition period. Indeed, when owners stick around to help a new owner, their "consulting fee" is often added in as part of the sale price. When the consulting isn't there, the price is appropriately discounted. Alternatively, some buyers pay the owner a separate fee for consulting, which effectively raises the overall value of the transaction. Note, however, that this conflict doesn't always exist. Some buyers may want the former owner to move on quickly so that they can take charge as they see fit and be instantly seen by employees and customers as the new leader.
- High Price and Minimal Disruption to the Existing Business. By placing conditions on the sale (e.g. that it will remain in its current location, keep key employees or maintain its current business configuration), the seller limits business opportunities for the buyer and drives down the sale price.
Prioritize Your Desired Outcomes
After you have defined your sale motivations and identified possible conflicts, the final step is to resolve conflicts by prioritizing the desired outcomes that are most important to you. Sellers often compile a ranked list of priorities that informs the development of their sale strategies, aligning their market approach with non-negotiable goals and motivations.
Brokers play an important role in helping sellers mitigate conflicts and achieve the best possible sale outcomes. In many cases, the most effective strategy for eliminating all conflicts is to engage in pre-sale preparation in anticipation of a future sale. With adequate time for planning and preparation, it's possible to reconcile conflicting motivations and sale priorities.