Why do business owners sell their businesses?
The reason for sale is one of the first questions asked by buyers and it can have a major impact on the sellability and value of a business. If the reasons do not stack up, it can give the perception that the seller is selling because the business is in trouble.
In deciding whether to market your business for sale, it is important to understand what you would like to achieve, not only monetarily but what you would like to do post sale – when you are no longer in charge of your company.
Here are the most common reasons for selling a business:
Retirement sales account for around 50% of our M&A deals. A much higher proportion of these retirement sales are engineering businesses whilst only 25% of our sales of B2B service sector businesses are due to retirement. Many buyers look specifically for a retirement sale as this is a solid understandable reason for sale; preferably there will be a management team in place, otherwise they will need to replace the owner with another senior manager.
When is the right time to retire? That is the subject of next month’s article.
2) The natural business cycle
In our experience, the sale of B2B service sector businesses is driven far more by the business cycle. Owners of these businesses are younger, particularly with IT and software companies. The driver for sale is when the business reaches certain tipping points on the growth curve. Typically with SMEs this is when the turnover reaches £500k, £1.2m and £5m.
At around £500k, owners start to have to extract themselves from the service provision side of their operations and focus on team management and building sales to support the team. If sales do not continue to grow significantly, the company lacks critical mass to cope with client and/or staff churn and the business stagnates. Joining a larger organisation gives the business that critical mass and takes the burden off the owner’s shoulders.
At £1.2m, owners have to put an operational manager in place to run the service provision team. To continue growing, they need a dedicated business development manager/account manager to keep the current client base happy. They also need to put in place good financial management and credit control systems and staff. This is the tipping point where the business is no longer “lifestyle” orientated. Joining a larger organisation or bringing in new experienced business owners takes the responsibility off the founder’s shoulders and enables the financial investment required to take on the more senior staff and increase the marketing budget.
At £5m+, the company comes on to the radar for mid-sized (£10m-£50m) trade buyers and private equity firms looking to build mid-sized groups. For companies that reach this point, this has often been the initial long term plan. They have a management team in place and have good prospects for continued growth but with a number of avenues to choose from.
3) Change in personal circumstances
A change in the personal circumstances of the owner tends to be what precipitates the sale of very small businesses (<£500k) or lifestyle businesses. For larger businesses, there is more at stake in terms of valuation, therefore the owner is more likely to wait until the business is in a good position to sell well. However we have encountered a number of personal reasons to sell, for example:
Inherited wealth: the owner no longer needs the income generated from running the business.
Desire to move abroad: we have helped business owners sell-up in order to move to Canada and Australia, as well as foreign nationals wishing to move back home.
Dispute between business partners: Despite good intentions and friendships at the beginning, business partners often develop different aspirations and/or financial needs from the business, which can lead to serious tensions between the partners. If one cannot buyout the other, then the best option is to sell before the business is affected.
4) Serial entrepreneurs
As business brokers, we like serial entrepreneurs as they are only source of repeat customers! Typically, they will build a business to a certain point over 3-5 years with the sole aim of selling it when it achieves certain metrics. Alternatively they will buy and build a group of inter-related companies. Either way there comes a point when the business is for sale.