Incentive to sell driven by financial payoff or personal reasons?
January 20, 2022
by a searcher from University of Notre Dame in Notre Dame, IN 46556, USA
For a smaller (~$500K in SDE), "eternally profitable" businesses, it seems that personal reasons would be a much more common driver to sell versus the financial payout, especially given lower multiples and subsequent capital gains taxes. I've seen conflicting views, but given this will largely shape my search, anyone see something I'm missing on that?
from New York University in Menlo Park, CA, USA
That being said, life does happen and people burn-out, get sick, get divorced, need to move, or just desperately need a lifestyle change.
Keep in mind that managing a staff of $40k-$75k employees is a very different challenge from working in the corporate world. Employees sometimes just don't show up for work, quit without notice, make mistakes with potentially catastrophic financial implications, upset clients, etc.
While all of these things happen in any business, a smaller business will typically be more dependent on each individual employee. If the Bookkeeper decides to quit without notice, now the suppliers aren't paid in a timely fashion, the company may also be late with payroll. If the Sales Manager gets upset and yells at a client and the client goes to the competition it could take months or years to replace the revenue. If the warehouse worker crashes the forklift, it may take a few days to get it replaced. Since the business only owns one forklift, now the warehouse can't receive new goods or ship large orders efficiently.
Many times, it isn't financially possible to create redundancies considering the size of the business.
All of these concerns add considerable stress to the owner's working life.
Some will decide it just isn't worth the worries anymore. Enough money has been made and saved over the years and perhaps now is the time to do something else with their life. These are the ideal businesses to purchase if you can bring the energy and drive that is likely missing from the current owner due to his burnout.
I consider these types of lifestyle choice clients to be legitimate sellers. It is far easier to find a buyer and put together a transaction at a reasonable valuation than the person who thinks they'll get 'rich' from selling their small business. The 'get rich' types typically have unrealistic ideas about what their company is actually worth in the market. The lifestyle choice clients are aware that most businesses fail to sell (~80%) and are excited to receive fair value for an asset that has afforded them their income and work related identity for many years.
from Oklahoma State University in Memphis, TN, USA
Not addressing a potential target’s reasons for selling early on can be a flaw in the search process, potentially wasting lots of time and money.
It is also why growing a company with add-ons Is often a lot harder to execute than it first appears.