Wednesday, January 20, 2010

Why sell your business?

After years of building enterprise value an entrepreneur is forced to decide if and when they should realize on the value they have created.

Sometimes a buyer just appears and offers more than a business is worth. However, just in case no one shows up with a wheelbarrow full of cash you'd better have a plan for a sale.

To develop the most appropriate action plan for a sale, the owners of the business should first identify the true motivation for desiring a sale. They should also identify the motivation they will present to potential buyers, which might be very different.

The rationale for a sale, usually presented to buyers, includes the following:
· Lack of next-generation family members in management is a common problem. Interests and lifestyles, in a second-generation, are different.
· Estate planning, or rather, the need for cash to pay estate taxes.
· Cash may be needed for other purposes. These might include a charitable gift, investment in other activities and the like.
· The requirement for capital or other resources to scale or reach critical mass in order to seize a market opportunity.
· Closely related is the opportunity to dramatically impact the cost structure through consolidation of functions or facilities.

The last two, which are key “inflection points” in the life of the business, are the “best” reasons for a sale.

However, many companies offered for sale are driven by more troublesome reasons.
· Fear of the future. The buying habits of a major customer may change, technology continually evolves or actions by a major or new competitor may seriously disrupt the market.
· Inability to continue as an independent company. Bank lines may be expiring, bonding might be unavailable, working capital needs may have become unachievable and the like.
· As for value accumulates, owners become more risk adverse and may seek liquidity to protect years of work.
· The management team is tired and worn out.

The real reason for a sale should drive the timing and methodology for buyer identification selected by the entrepreneur.

We will look at alternatives to a sale in a future post.

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