Congratulations! By merely entertaining the question “Should I sell my business?” you are in the minority of business owners. To some, this question is for doubters, sellouts, quitters. Alas, nothing could be further from the truth. Asking this question is the first step toward a successful and lucrative business exit – something few small business owners ever achieve.
While the question itself is an excellent one, the answer is rarely a quick yes or no. The best way to get an answer to a complex question like “Should I sell my business?” is to take a deeper dive by asking some additional clarifying questions.
In this article, we’ll discuss why “Should I sell my business?” is an excellent question for business owners to ask, offer three important follow-up questions, and share five common scenarios that lead owners to start thinking about a business sale.
As writer and philosopher John Ruskin once said, “To be able to ask a question clearly is two-thirds of the way to getting it answered.” So, let’s get started.
Who this article is for:
This article is for small business owners who are contemplating a sale to an outside buyer after several years (even decades) of owning a successful business.
Who this article is not for:
This article is not for owners of venture capital (i.e. VC-backed) startups considering a sale as part of a high-growth strategy. It is also not for owners who are looking to sell a business that is declining or heading towards failure or insolvency. Both distressed businesses and high-growth startups are different animals.
Question #1: Why Are You Asking “Should I Sell My Business” Now?
The first question to ask yourself is why you’re thinking about selling your business. Has the idea of selling been percolating in the back of your mind for a while now? Or did something happen recently that has prompted you to think about selling?
Business owners often approach a business broker or M&A advisor saying that they’ve been thinking about selling the business for months or years. Selling is something that business owners may ponder from time to time but repeatedly shove to the back-burner. There are so many pressing concerns when you own a business that it can be hard to focus on an event that seems distant. Eventually, however, these owners are ready to get answers.
The other way selling the business enters an owner’s mind is through a recent trigger event. A trigger event can be a number of things; from hearing that a competitor was just acquired for a high sale price, to an unwelcome employee issue, to an existential crisis like a health scare.
Regardless of how long you’ve been pondering the question “Should I sell my business?” the fact that you’re asking it deserves careful consideration. Start by getting clear on why you’re asking the question now, and resist the urge to brush it off or postpone finding answers. Chances are this question has come up for some very good reasons that deserve further attention.
Question #2: Is Selling a Short-Term Fix or a Long-Term Strategy?
The aim of this next question is to peel back yet another layer of the onion, so to speak. There are a number of possible answers to the question of why you’re thinking about selling the business. Here are a few examples:
- A client hired away one of your top consultants for the second time this year
- It’s time to install a new piece of equipment or technology
- The current location of your business needs to expand or relocate
- You just celebrated the birth of your first grandchild
- You have less energy and enthusiasm for owning your business
- Several of your competitors have been acquired in industry rollups
In the first three examples, selling the business may seem like a good way to solve a problem you simply don’t want to face head-on. In a nutshell, selling is a form of problem avoidance. Implementing solutions to these issues would require time, money, and effort. The actual solutions in these short-term scenarios could be:
1. A client hired away one of your top consultants for the second time this year
- Solution: Hire an HR manager (or outsourced HR firm) and revisit your employment agreement with your attorney
2. It’s time to install a new piece of equipment or technology at your business
- Solution: Talk to your CPA about drawing on a revolving line of credit, or finding a leasing company, and hiring specialists to install the equipment / technology and train employees
3. The current location of your business needs to expand, or you need to relocate
- Solution: Buy real estate at a new location, move the business, and sell or lease back the existing real estate
This isn’t to say that selling the business is the wrong approach in examples one through three. But are you just kicking the can down the road to a new owner? More importantly, will potential buyers be excited about the opportunity to acquire a business with obvious unresolved issues? Maybe. Maybe not.
In examples four through six on the list above, selling may actually be a good long-term strategy. For example:
4. You just celebrated the birth of your second grandchild
- Conclusion: You’re ready to hand over the reins so you can have unlimited free time to spend with family and friends
5. You have less energy and enthusiasm for owning your business
- Conclusion: It’s time for someone with fresh ideas to own the business so that you can focus your time and energy on something new
6. Several of your competitors have been acquired in industry rollups
- Conclusion: The industry is changing and your business will need next-level scale and management to remain competitive in the future
As you can see from these last three examples, there can be both personal and business reasons where selling your business is a logical strategy. Every business owner eventually reaches a point where they feel done with business ownership, ready to move on to a new chapter of their life. Likewise, selling may be a prudent business decision for the continued success of the company.
A word of caution: You may regret the decision to sell your business based on a quick-fix scenario. Far fewer owners regret selling when it’s part of a long-term plan for both their life and the business.
Question #3: Have You Hit One of the 5 Walls of Small Business Ownership?
Many business owners in the lower middle market (annual sales approximately $5M to $50M) build their businesses up to a point, then go no further. In short, they cap the business at a certain size, run it to build personal wealth, then exit when they feel ready. While this progression may not make the most sense from a purely business perspective, it is nevertheless how the business-ownership life cycle typically starts and ends.
Given the nature of business ownership, it’s helpful to understand the “walls” that business owners hit, some of which we’ve touched on above.
Let’s peel back one more layer of the onion and get a deeper understanding of which wall you may be hitting, and whether selling is a good answer to the question “Should I sell my business?”
[Note: The five walls are outlined in Richard Trottier’s book, Middle Market Strategies: How Private Companies Use the Markets to Create Value, which I highly recommend. I also referenced them in a New York Times blog post several years ago titled Reaching Your Limit as a Business Owner.]
Hitting the Motivational Wall
Motivational walls typically come from within the business owner themselves, but are no less real and powerful. In fact, most business owners in the lower middle market run their company – for better or worse – based primarily on personal motivators.
Motivational walls are largely about the owner feeling tapped out with regard to their own resources of energy, creativity, ability, and focus. This wall can also come in the form of being finished with risk; wanting to take some chips off the table, so to speak. This is completely normal.
There is often no single solution to hitting a motivational wall. It becomes a matter of defining your personal and financial goals, then moving forward from there. If you’re feeling “tapped out” as a business owner in some way, then begin your exit planning today. It can take months or even years to position the business for a sale, find a buyer, and get a deal closed. There’s no such thing as getting educated on the selling process too early.
Hitting the Capital Wall
Capital can come in various forms, but the most common is financial. Small businesses are often constrained by their ability to grow either organically (creating excess cash flow via the company’s profitability), or through external sources of capital.
The feeling of being “done” with business ownership often coincides with the realization that you are either unable or unwilling to access the capital required to take the business to the next level. As odd as it may sound, business brokers talk to many owners who feel like selling to a new owner is the best way for the business to grow and thrive in the future.
Hitting the Operational Wall
The operational wall can also have several iterations. It is an internal wall similar to the business owner’s motivational wall, but in this case the constraints are within the business itself.
The most common operational walls are:
- Lack of senior management team (i.e., overreliance on the owner)
- Inability to analyze and make meaningful improvements to productivity (i.e., using increased sales as a proxy for growth)
- Few professional tools and processes for measuring performance (i.e., decisions are made with little to no reliable data)
- Absence of strategic planning and long-term vision
While operational walls like these cap the growth of many small businesses, they are often seen as opportunities by prospective buyers.
Hitting the Market Wall
The market wall is purely external. There is often a limit to how large a market a small business can serve. In fact, this is a primary reason why many of the companies we see in the lower middle market level off and stagnate.
Small businesses often make an initial market for their product or service, but lack the ability to go beyond it. The size of the market can be constrained by the business’ geographic footprint, supply chain, suite of services, product offerings, or customer base.
Selling the business to a larger industry player, private equity group or strategic buyer often results in a much bigger market for the business’ products and services.
Hitting the Ownership Transfer Wall
Selling a business – or any exit strategy – is a complex undertaking at best. Success rates in the business-for-sale marketplace are shockingly low: Only about 20% of businesses that are taken to market actually sell.
The question “Should I sell my business?” is part and parcel of the transfer wall, which few owners successfully navigate. There are some stubborn myths and misconceptions associated with selling a business. The biggest of these is that it is something the business owner simply does when they’re ready, with little to no advanced exit planning.
If You Think You Should Sell Your Business, Don’t Procrastinate
Selling a profitable business is often the largest financial transaction of an owner’s life. It is also fraught with emotion. Many owners know in their hearts (and minds) that selling is the right decision, but have a hard time pulling the trigger on doing it.
We once worked with the founders of a family business who had known for the better part of three years that they should sell the business. But, like many owners, they held on until life made the decision for them.
The founder had a stroke and his wife was diagnosed with a degenerative disease, all within the span of about six months. A family member expressed interest in taking over, but the founders knew he wasn’t qualified. Their only option was to sell the business as quickly as possible, weakening their position to negotiate on deal structure and valuation.
Business owners have a tendency to ride the wave too long. Rather than put in the effort to properly prepare the business and sell at an opportune time, they wait until an exit is forced upon them. This type of exit just stinks. There is no downside to getting your business sale-ready well in advance of an actual sale.
Start by talking to a business broker about the value of your business, and whether your financial statements are ready for the rigors of buyer due diligence. Also, talk to a financial planner about how the proceeds from a sale would fit into your overall financial plan.
“Should I Sell My Business?” Is an Excellent Question. Ask It Every Year!
Tom Deans, third-generation family business owner and author of Every Family’s Business: 12 Common Sense Questions to Protect Your Wealth travels the world encouraging business owners to ask the following question at least once a year: Are there any buyers for our business, and is now a good time to sell? This is exactly what his family did at their multinational corporation year after year. As a result, they ended up selling at the best possible time for the best possible sale price.
The beauty of asking “Should I sell my business?” is that regardless of your ultimate decision to sell or not, the question will lead to new insights about what you want the future to hold for you and your business. If you’re ready to ask the question, the advisors at Allan Taylor & Co. are ready to help you find the answers.