A business owner needs to consider two crucial elements in making a decision to sell; (1) As a business owner where they are personally (quality of life, family matters, age, etc.), and (2) What position in the life cycle of a business is their company. The business owner already fully realizes that ever product and service has a life cycle, so why is it sometimes so hard for them to attribute the same fact to their business.
This excellent article by Ted Burbank is very insight, and a must read for any business owner.
If You Are Considering Selling Your Business,
Don’t Let a Bad Economy Stop You
By: Ted Burbank, CBI, FIBBA
There is a rhythm and pattern to life and to business. The seasons and cycles of the plant world are generally well recognized. In example, a plant sprouts, grows to maturity, flowers or produces fruit then withers and dies to decay and enrich the soil in support of the next cycle. Businesses have their cycles also, but they need not die in order to benefit the next generation.
The life cycle of a typical business begins with an idea or concept, the start up or grand opening, continuous fine tuning and adjustment until things seem to be running smoothly. At this stage business is good and, albeit financially rewarding, not as exciting as previously. Eventually, essentially all business owners come to the stage where the business begins to interfere with how they wish to live their lives and they begin to have thoughts of selling the business.
Many never act upon these thoughts for countless reasons and as a result less than 25% of small businesses and franchises are ever sold. This is indeed a tragic statistic but it gets worse in a down economy, not because of the economy – but rather because the decision was not made to sell at the time it was supposed to have been during the normal cycle.
A Time to Grow and a Time to Go
Perhaps I can explain it this way. There is a time to grow and if you are not focused on growth – it’s time to go. There is no status quo. Either grow or go. There comes a time in every business’ cycle when a business owner should make the decision to sell and sell to the entity that will take the enterprise to the next level. This time can be recognized as when the demands of the business begin to conflict with an owner’s desired lifestyle. This optimum time or Window of Opportunity to sell at an optimum price does not last very long.
When the decision to sell is postponed in favor of waiting out a bad economy, the window of opportunity will often close and business cycle’s end game begins and the business’ value begins to diminish. This end game is not one designed or controlled by the owner but rather one enabled by the outside forces created by allowing a business to coast.
When that window of opportunity passes we generally find the owner just going through the motions and allowing the business to coast or, more accurately stated, slide. Decisions to invest in the business are postponed or rejected. Eventually, and often, very quickly the slide accelerates with the end game no longer controlled by the owner. Much of the value of the business has been dissipated. At the end, either the business is "Sold" to a competitor (at the value of selected assets) or closed and the assets liquidated.
A Down Economy Intensifies the Usual Seller’s Market
Selling more than 2,000 businesses through good times and bad over the last thirty years has taught us that good businesses can and do command premium prices in down economies and here’s why:
- Layoffs, company closings and down-sizing flood the marketplace with people wanting to buy businesses
- Pricing formulas do not change because of economies
- Most owners of good businesses postpone selling in a poor economy resulting in fewer opportunities for the increased number of buyers
- A business’s value is dependent upon its outlook for future profitability
- You can get tomorrow’s price today for your business if you choose a buyer who recognizes the opportunity your business represents and considers expectations of future profitability when assessing value.
In order to obtain an optimum price for a business, regardless of the economic condition, one must attract the type buyer who will recognize the opportunity the business represents. In real estate, optimum value is determined by the entity that will recognize highest and best use of a property. Business prices typically reflect an acquirer’s perception of future earnings under their ownership. Therefore, the optimum value of a business is determined by the buyer who recognizes the most opportunity the business represents. A business can be considered worthless to one yet be worth millions to another.
How can you tell if it’s time for you to think about selling? We have developed a little quiz just for this purpose.
A One Minute Quiz
for Business Owners Only!
This One Minute Quiz will help you answer the most difficult question a business owner ever has to face. Count your Yes answers to the following questions to determine where you are in your business’s life cycle.
The Question: Should you begin preparing your succession plan or perhaps decide to sell your business?
Your number of Yes answers
0 -3 Yes
Congratulations! You are happy and probably quite prosperous in your business. Keep it up.
4-6 Yes
Pay attention to your "early warning" signals!" It is best not to make the mistake of staying too long! Go out on top. Sell while you are still having fun. Best to start the planning process early. The actual succession or sale process can take a long time.
7-10 Yes
Don't let time spoil the fruits of your labor. Most great men and women in history have had more than one career. It is time for you to decide that you want a change. Choose what you want to do next, and then act.
In Summary:
If you score between 7 and 10 and decide to put off selling until the economy improves - be warned. The value of your business is at its peak now. Putting off your decision to sell increases the odds that you will end up with the 75% of business owners who fail to receive significant value for the business.
Why a savvy business owner may decide to sell his business in a down economy:
- Savvy business owners realize that if you aren't growing you should be going
- Business pricing methods remain unchanged even in a down economy
- Fewer good companies are on the market as their owners await an improved economy
- The number of serious buyers in the marketplace increases in a down economy - seller's market.
- There is a narrow window of opportunity between growing one’s business and the time for selling it.
Sell while you are still having fun and you will leave in style with a pile.
