Reasons for Selling Your Business
There are several popular motivations for selling your business. Determining what they are is an important stage of the sell-side M&A process. Having a clear vision of the reasons for pursuing an exit strategy can play a crucial role in preparing the business for investor due diligence, determining optimal valuation range and conducting final price and deal terms negotiations. Let’s dive into the more common reasons for selling your enterprise.
Personal reasons
Many business owners, especially SME segment, tend to spend most of their adult life and career developing their family business for the purpose of someday passing that legacy on to their offspring. However, in some cases, the next generation is not interested in the family business or the industry it operates in, which means that there is no longer a next in line to inherit it. SME owners often believe that the owner-manager structure is key fundamental to running a successful business and would therefore rather sell it than leave it in the hands of hired management team without family supervision. Of course, selling your business also makes sense in terms of financing your retirement plans, regardless of your age or family status. Whether to travel the world or spend time with your children or grandchildren, life is full of experiences, which one can easily enjoy by exiting their business at the right time and achieving the necessary financial freedom to do so.
Shifts within the internal business environment and strategic vision could also give rise to strong personal reasons for wanting to sell a business. There could be tensions within the board room or at a shareholder level. There could be arguments around the future strategy and the company’s direction. There could be division around the need and/or feasibility of further capital injections from the owners. Some of the owners might want to retire – others may want to continue running the business, without buying out other fellow shareholders. This sort of disagreements could lead to alienation on a personal level, which tends to resonate through the business and affect long-term performance. This sort of internal challenges tends to be a strong driving force in divesting decisions.
Changing business environment
The many elements of the external environment are continuously changing and adapting to those swings is not always easy. Furthermore, uncertainty and black-swan events are not always easy to survive and deal with – your business model or risk management approach might not be flexible or sturdy enough to remain successfully indefinitely. Globalization, evolving consumer behaviour and disruptive business models are continuously rearranging the competitive landscape in a myriad of industries. Often, business owners prefer selling their business to larger and more agile regional or international player pre-emptively, than risk staying in the game and potentially lose their market share and strong financial performance with it. The continuously changing regulatory environment can take a toll on working capital management and make it harder for some enterprises to stay in business and compete effectively. Regardless of the specific driver, changing the business environment can be devastating for the business, especially when it is clearly not financially or strategically equipped to survive in the long term. The best options, in this case, are to find a buyer for the entire business, while financial fundamentals support a strong valuation, or attract a strategic partner to acquire a (non-controlling) piece of your business (at a good price) and bankroll your strategic rotation, which will most likely require (depending on business size) massive CAPEX and working capital investment.
Lucrative exit at a high ROI
Entrepreneurs generate profits over time through their successful business models, which then get reinvest for expanding market share, improve growth prospects, renew or improve assets, boost capacity, hire the best talent. All those efforts ensure a long-term economic moat. However, like every investor, business owners look for a good yield on their investment. At the right stage of the company’s lifecycle, when entity’s model is still attractive, the fundamentals are strong and the market is favourable, a strongly favourable valuation can be obtained and lucrative buy offer easily negotiated, so that the entrepreneur can finally realize the ultimate return on their long-term investment by exiting their business. Whether to reinvest the funds elsewhere or just spend it as they see fit, cashing in on the best ROI possible is every investor’s ultimate goal. The optimal endgame for business owners is achieved in bringing future business profits forward by way of selling their company at peak valuation fundamentals, including:
- wide economic moat
- promising growth prospects
- stable revenue streams
- efficient cost structure
- good EBITDA
- favourable market environment
- capable management team
- adequate gearing ratio
- strong working capital
Macroeconomic environment
Apart from the specific company risks on a microeconomic level, which investors analyse and factor into their acquisition strategy, buyers consider country (systematic) risks as well. Macroeconomic factors and fundamentals, on a national or regional level, are important drivers of investor sentiment and may include:
- political situation
- international reputation
- regulatory environment
- inflation and GDP levels
- current account balance
- government debt levels
- budget deficits
- tax regime and treaties
- unemployment rates
- FX rates and currency risk
- rule of law and democracy ratings
- aggregate demand levels
- capital markets activity
- banking system stability
- average ROI and payback periods
All these factors and what the country scores in these categories is also crucial for business owners and their exit strategy. Selling your business at the right moment also involves analysing the macroeconomic environment. If the country’s performance in some or most of the above fundamentals is gradually deteriorating, selling your business now might be better than doing it at a later stage, when systematic risk might be a lot higher and your company – no longer attractive to buyers or valued at a lot less than it is worth on a microeconomic level. On the other hand, the current country risk level might be off the chart, which would imply that company valuations might not be optimal and perhaps sellers should delay their exit strategy and wait for a more favourable economic environment (especially if conditions are gradually improving or expected to improve in the mid-to-long term).
The above concept holds not only on a national and regional level but also from an international standpoint. Global economic downturns or financial crisis are a cyclical phenomenon and have a negative effect on investor sentiment, which implies that selling your company during a recession is not the best strategy and waiting for the storm to pass might be a better approach to divesting. On the other hand, the first few years post-crisis usually present interesting business opportunities, with government/central bank stimulus, favourable interest rates, low inflation, gradual demand and consumer sentiment recovery, expanding revenues and already optimised cost structures, and strong economic forecasts. Once the downturn phase of the economic cycle is complete and recovery is afoot, investors tend to look for acquisition-growth opportunities (often via LBO or all-stock-deals, if cash balances are depleted post-crisis). Therefore, if your company’s fundamentals are strong and interest rates are low (incl. risk-free rate), the entity’s valuation will most likely be strong and the buy-out offers very lucrative. Of course, this will most likely hold true further down the growth phase of the economic cycle.
Opportunity
Selling your business might not be on the cards for you in the long term. However, a better investment opportunity might present itself to you. If you cannot possibly pass up this new lucrative deal, you will probably have to exit your current business or at least put it up as collateral for securing the financing required as part of the new unexpected opportunity. This is obviously a compelling argument for selling your business, but often you might not be able to secure optimal price offers for your business, especially if the other deal is time sensitive and you have to rush through your business sale. This is not a great position to negotiate a sale from and your constraints are often leverage for the buy-side. We usually advise against this sort of exit strategy.
On the other hand, this opportunity factor could present itself in a different way. Particularly, the entrepreneur might not be considering divestiture, but then a very eager buyer surfaces out of nowhere. In this case, it is important that you at least listen to the offer and analyses it, even if your business is doing great and you are not looking to sell at this stage – do not forget that business could be brilliant today and bankrupt tomorrow. If the buyer is determined to acquire your business at any cost, then you have all the leverage and the potential for negotiating a buy-out price way above valuation and achieve a sky-high ROI is great. Those surprise opportunities should not be passed up without thorough consideration and at least some negotiation effort.
Whatever your motivation for selling a business is, you must do it right. You need a trusted advisor in your corner and help you determine the optimal valuation and negotiate the best possible terms on your behalf. Do not forget that pretty much every business asset is up for sale, so long as the price is right.
