Business mentor Colin Turner looks at the reasons for selling a business, as well as some potential pitfalls.
Many business owners choose selling the company as their chosen exit strategy. The position that all owners want to be in is that they are selling not because they need to, but because they want to, and it is on their terms.
There are a number of reasons why a sale is made: with the most desired case arising when a business is approached by a competitor or an investor that offers an obscene amount of money.
Other scenarios include becoming bored with the business: accepting that though a good business, new blood and drive is essential to its future growth, or because a business owner is seeking retirement from the business as they look to reap the life-style and prosperity gained from the sale.
There is also the consideration that an exit has always been part of the plan. Most entrepreneurs seriously consider what the exit route is and when. Venture capitalists are always interested in the exit route, as it is when they get the best return on an investment.
There is one bad reason for selling: namely when one is forced to sell, because the business is slowly dying, hemorrhaging cash or can no longer cover its liabilities or debts.
If this situation ever arises, then the business must take action to sell before the situation becomes dire. Most times, business owners and entrepreneurs think that they can get through, particularly if they can find the financial resources to keep going.
It is worth noting that numerous businesses disposed of for a good sum have then been later sold on for a princely profit again, because the previous owner had not been aware, or overlooked, what the business could have achieved in the long run. The incoming entrepreneur has new eyes and can see objectively, rather than subjectively.
The founder of dental payment plan business Denplan exited her business in a deal worth £1 million, a sale which she was very pleased with. It was sold two years later to n insurance company Private Patients Plan for £40 million. That is why it is important to understand what a company is fully capable of achieving when planning to sell.
The only way to do this is to bring in outside views. The external perspective can be immensely valuable in identifying the hidden assets and opportunities that have been previously overlooked in a business. Not seeing the wood for the trees is very true in business.
A business owner often has an emotional subjective view of the way they have built and run the business; the external advisor has an impartial objective view of the business and what it can really be capable of achieving.
If selling to an investor, it is important to be aware that they will very often tie the purchase into an equity share of the business being retained for a two-year period. This is done to ensure that the exiting business owner and their experience will help develop the business potential that is being sold, as well as covering the bets.
If, for example, the business does not perform to the buyer’s expectations, a clause will exist to ensure that the equity payment is not made two years later. This scenario occurs with some frequency and sees business owners, which have built up a company, witness it being slowly run into the ground by money-minded-investors, who exert strict controls that adversely influence the running of the business.
The resulting business owner has two years of hassle and ends up with just the 50 per cent of the business originally paid.
The best outcome is to sell outright, even though the offer may be less. A business sold at a one-time sales price of £2 million is far better than a £2.5 million price settlement, where 50 per cent is paid up front and the balance is paid two years later: a period in which the exiting owner has no control over what happens as they are no longer the owner, merely a minority shareholder.
A client of mine, directly against my advice, sold his company for 50 per cent payment with the rest in shares. He was given a seat on the board of the larger company, though was voted down on all decisions. Twelve months later the shares he had been given had devalued by 90 per cent
At the time of writing he is still fighting daily, but to little avail. He is probably under more stress now than when he owned the company.
Business mentor, Colin Turner, can be found at www.ExpertTrustedAdvisor.com