In this article, we’ll talk about why it’s important to ask this question in both good times and bad. The decision to sell or keep a business can depend on financial performance, industry outlook and growth potential, the level of owner involvement in the business, alternative opportunities, health, family, retirement, personal financial goals, or the potential to transfer the business to family members, partners or employees.
What Are the Reasons Owners Sell Their Business?
Let’s examine the scenarios when business owners might consider an exit. Then we’ll follow up with reasons why owners decide to keep going.
Various surveys show that 50-90% of owners have no exit plan. And while many business owners plan to pass their business on to other family members, most sources say that well under half of family owned businesses will transfer to the next generation.
Reactive
(limited opportunity to keep the business)
- Divorce
- Spouse wants owner to sell
- Changing family priorities
- Health or loss of energy
- Loss of passion or interest
- Unwilling to weather more downturns
- Tired of customers, difficult customers
- Changing customer requirements
- Tired of managing employees
- Tired of hiring and retention efforts
- Tired of franchise fees, rules, or restrictions
- Increasing competition
- Unprofitable
- Unsustainable model
- Legal issues
- Changes in regulations
- Received unsolicited offer
Proactive Planning
(exit plan indicates time to sell)
- Achieved goal to eliminate debt
- Achieved financial goal to retire
- Get ahead of silver tsunami
- Sell before next election
Could be Proactive or Reactive
(exit by defaul versus per plan)
- Other opportunities
- Lifestyle choice
- Not qualified to grow business
- Lease ending
- Partner buyout
- Industry undergoing acquisitions and consolidation – an exit opportunity
- Avoid pending or future competition
- Avoid pending or future market conditions
What Are the Reasons Owners Keep Their Business?
Here are some reasons owners keep their businesses. Since we know most business owners do little or no exit planning, we know most owners keep their businesses without a comprehensive game plan in mind. Notice that most of the items on both these lists of reasons to keep and reasons to sell are reactionary.
Reactive
(limited opportunity to sell the business)
- No better option to make money
- No better use for the proceeds
- No better use of owner’s time / no hobbies or other business interests
- Spouse or family member wants owner to keep going
- Lack of confidence in ability to sell
- Profitability is too low
- Too much debt
- Legal issues
- Need to address customer concentration
- Need to improve accounting and records
- Need to improve processes
- Need to more clearly delineate business divisions or departments prior to a sale
Proactive Planning
(exit plan indicates viable growth)
- Targeting a certain valuation prior to exit
- Targeting a wealth goal prior to exit
- Plan to grow through acquisition
- Plan to improve management team
- Plan to decrease owner involvement
- Plan to improve product or service mix
- Plan to improve three-year profit trend
Could be Proactive or Reactive
(keep business as a default)
- Profitability is too good to give up
- Potential is too good to pass up
- No interest in pulling money out of the sale
- Owner likes the status quo
- Family member may want the business
- Cannot agree with partners on a sale
- Sale will not generate enough to retire
- Desire to reduce inventory prior to a sale
- Desire to upgrade are repair physical assets
- Desire to remodel or repair real estate
- Desire to de-risk the business
- Optimistic about more recurring revenue
- Optimistic about improving revenue
- Optimistic about improving market share
- Optimistic about improving profitability
- Optimistic about landing key contracts
- Optimistic about improving staff
Some owners have no motivation to sell their business. I spoke to one business owner in his forties with a few automotive businesses. He planned to run these businesses until retirement. He was okay with the possibility of a minimal gain on the sale of his internal combustion engine (gas-powered) businesses 15-25 years in the future in a world of electric vehicles. His passion for his work was more important than a big pay day from an exit.
In the next few sections, we’ll discuss the selling scenarios when business is going well and not so well, has leveled off or has growth potential, and is absentee or not absentee.
Should I Sell My Business When It is Doing Well?
Many business owners consider selling when their business is in a challenging position, as they should. However, the most opportune time to consider a sale is when the business is doing well, yet this is the time when owners don’t give it much thought.
If business is good, exit planning may be less urgent, but it is no less important. Reasons to sell in good times include increasing the chances of a successful sale, maximizing the sale price, reducing risk or rebalancing ones portfolio of assets, shifting resources to a different opportunity and many other reasons we’ll explore later. The best time to sell is typically under non urgent conditions when the business is more valuable and there is more time to properly execute a sale.
Should I Sell My Business or Close It?
If a business is losing money or not very profitable, the owner may be wondering if there is anyone that would buy it. The surprising answer is yes in certain cases. If there were special circumstances that prevented the owner from performing well, a buyer might understand and still be interested. This business would be difficult to sell but not impossible.
Also, there may be value in the assets, the goodwill or both. While the owner of a distressed business may not net much from a sale, they may fare better than simply closing the doors. If stuck in a lease, then closing the doors would result in a significant decline in credit score plus penalties and legal fees for back rent.
If monthly losses are significant, the sale of an ongoing business may not happen quick enough or at all and the seller’s best option may be to work with the landlord and conduct an asset liquidation sale. Perhaps there is sufficient value in the business assets to help cover more rent payments or a lease buyout arrangement with the landlord.
Business owners should seek advice from several business brokers. Some brokers may not feel they can help or may not want the listing. Others might be able to get the seller out of a jam by selling the business or its assets. The broker would have to assess whether or not they could at least make their minimum fee when the business is sold.
Is My Business Profitable Enough to Sell?
Sometimes a business is more profitable than the owner realizes. Most owners can cite annual revenue numbers, but far fewer owners can cite their profit numbers. There are many types of profit, many things that contribute to profit, and different ways of showing profit on tax returns and profit and loss statements.
Most owners and accountants want to minimize taxes. They may do this by depreciating assets or by deducting discretionary expenses that are not necessary to run the business, such as an automobile. These items are called add backs because they are added back to the net operating profit to show the true benefit of the business to a buyer.
Interest is another add back. Loans are specific to owners and the new owner will not be responsible for the current owner’s loans or interest payments. Once you adjust you profit with add-backs, you’ll know the true profitability and the likelihood of a sale. Read this article on how to find the true profit in a business.
And as we mentioned before, some unprofitable businesses can be sold, especially if there is significant goodwill and/or assets.
Should I Sell My Business or Grow It?
When an owner is ambitious and excited and can see the opportunities, growing a business has its appeal and the benefits could be tremendous. However, the effort should not be underestimated and the likelihood of success should not be overrated.
Besides financial reasons, there are many personal and emotional reasons to consider selling or growing a business. Those reasons should be considered with the help of friends, family and trusted advisors such as CPAs, exit planners, estate planners and wealth advisors.
What are the Benefits of Growing a Business?
Growing the bottom line profits of a business can be extremely rewarding financially and professionally. After considering the risks and rewards, if growth is the best option, the benefits may include:
- Personal fulfillment
- Increasing the value of the business for an eventual sale
- Ability to help more people (customers, suppliers, employees)
- Increasing influence in the community
- Increasing wealth, savings and security
Growing a Business: surprising disadvantages and challenges
Growing bottom line profits can be challenging and may reach a point of diminishing returns. Growth is not always positive. There are some challenges and disadvantages to consider.
Potential Growth Challenges
- Profitability stalls despite revenue growth
- Increasing complexity
- Declining synergy
- Higher stress / lower enjoyment
- Staffing and management challenges
- Owners skills are limited
- Declining owner control
- Culture changes
- Capacity, space or asset constraints
- Difficult merger of acquired businesses
Disadvantages of Growth
- Increased effort
- Increased expenses
- Awakening competitors
- Increased need for process control
- Prolonged exposure to external risks
- Concentration of risk from re-investment
- Need for higher level advisors: tax, legal, etc.
- Fewer potential buyers for the business
- SBA loan capped at $5M
- Type of acquirer becomes more difficult
Should I Sell My Absentee Business or Keep It?
The decision to keep or sell the business can be different for an absentee owner than an owner-operator. An absentee owner may be able to accept a lower profitability because they are benefitting from the time saved by not being immersed in the business. Absentee owners can leverage their earning power by keeping their day job or running multiple businesses rather than fully engaging in a single business.
Businesses that are run absentee are attractive to buyers and command higher prices. If you are considering selling a profitable absentee business, don’t underestimate all of the benefits you will be giving up when you sell it. It may be tough to find other opportunities that can beat the combined benefit of profits and free time.
Enterprising minds are always exploring how to leverage absentee businesses into additional absentee businesses. If you sell your absentee business to trade for another absentee business, you may pocket more from the sale but you’ll have to pay more for the next absentee business.
However, if you can develop expertise and processes for converting owner-operator businesses to absentee, they can build a portfolio of absentee businesses or flip businesses after “remodeling” them from owner-operator businesses to higher value absentee businesses.
This is not a recommendation to newcomers. It is extremely difficult to pull off and better left to pros with deep pockets and higher risk tolerances. Owners rarely, nor should they, outsource critical functions such as finances, critical hiring, significant purchasing, and strategic decisions. Typically, the strongest passive income is semi-passive and strongest absentee businesses are semi-absentee versus fully absentee. See this article on absentee business ownership.
Should I Make My Business Absentee Before I Sell It?
Buyers are always interested in knowing the owner’s level of involvement and how much the success of the business depends on the owner. Larger businesses ideally have a management team and a succession plan. Smaller businesses ideally have more than one manager who is not an owner.
If you can manage the challenges of improving a business to be less dependent on you as the owner, you can increase your chances of a sale and probably net more money from the sale. This is another focus area and benefit of exit planning.
However, be reasonable and don’t pursue initiatives that are too elusive, take too long, or jeopardize strong or stable financial performance. Review all the risks covered in this article. Assess your abilities and motivation, and seek input from a team of trusted advisors.
Summary
Business owners have a lot to consider when evaluating when to exit their business. They have to know themselves and their abilities. More importantly, they cannot ignore things out of their control. Owners who understand that business cycles are often affected by powerful and uncontrollable forces are better equipped to decide when to keep going or to take the chips off the table and book the profit.
Business brokers and exit planners can help provide an estimated value range for the business, insights on how to prepare for buyers, and how long it might take to sell a business. Ideally, all of these discussions should happen well before an owner needs to sell.
To understand the benefits and risks of growing the business or exiting the business, owners should learn or engage in exit planning. In a companion article about exit planning and business timing, we’ll consider business, personal and external factors including the many factors outside a business owner’s control.
The article also shows scenarios where owners decided to grow the business but did not fully consider the risks. Timing is something that cannot be mastered but can be addressed systematically to guide decisions. It involves a comprehensive look at business risks and the process for mitigating them.