Tuesday, February 2, 2016

What are legitimate reasons someone may wish to sell a small business?

Business people looking at purchasing an existing business are often worried that there is a hidden problem.  Understanding the seller's motivation can be key.  Here, in my experience, are the top legitimate reasons someone might have for selling a small business.

Hello everyone, it's David Barnett once again and I've got another viewer question, this time from Peter.  Peter asks, why is the vendor selling?  What is the motivation?  It is a question that I've always heard time and again from every buyer who has ever looked at a business that is for sale.  Why is this seller trying to sell his business?

Now the fear that the buyers have, reasons why people get motivated to ask this question, is that they are worried that the reason the seller wants to sell is because the business is awful, it's losing money, it's failing, it's about to go bankrupt and someone is trying to pass a rotten hot potato into their hands.  So they are worried about this question of motivation, why is this person who owns the business really trying to sell it to me.

In my experience, and I've talked about this before in other videos, people rarely sell a small business for financial reasons.  Very rarely do they say, okay, today is the day I am going to cash out and make my fortune.  This is the stuff of legends and stories and famous people, entrepreneurs that get speaking career because they can talk about the big business they sold. 

Very often what happens when someone sells a small business is that they get a couple of years multiple on their earnings.  It's not like you are going to cash out your business and become fabulously wealthy for the vast majority of entrepreneurs.  So then, why would someone sell a small business, particularly a good one that makes a good, decent profit.

If you have a good business that makes you hundred thousand dollars year in, year out.  Why would you ever sell?  Well, it turns out that there are perfectly, legitimate reasons for selling a business but they are not financial or business reasons generally.  They are almost, always personal reasons.  Remember a small business in a lot of ways is simply an extension of the individual who happens to own and operate the business.

So the number one perfectly legitimate reason why I would have sellers come to me while I was a broker come to me and say, I would like to sell my business, is burn out, fatigue and exhaustion.  Think about it this way; if you were in the same job for fifteen years, do you think you might get bored of it?  Well, for people who have a job when they get bored of their job, they go looking for another job.  They either look for a transfer within their company or they go looking for another place to work and when they find that job, they give their notice at their first job and they move to a new career.

For a business owner, it's not that simple.  You can't just opt and leave the business because for a many, great many entrepreneurs, majority of their family’s net-worth is tied up in that business.  They can't just walk away from it.  So, in order to change what they do every ay, to get a new "JOB" so to speak, they actually have to sell the business and then either go get a job or go start another business or maybe even buy another business.  It's a perfectly, legitimate reason for someone to want to sell a business.  They just can't stand it anymore because they have been doing it for so long.

The second reason, of course, is retirement.  Now this is a natural reason and people expect to see this from someone who is maybe 65 years old or older.  What's interesting about people that want to sell because of retirement is I have noticed that entrepreneurs who are happy and enjoy their business and what they do every day, tend to stay in their business much longer than what we traditionally think of as a standard retirement age. 

Most of the business owners who ever came and spoke to me about selling for retirement reasons, if they were in their late 50s or early 60s, it wasn't usually because they want to come in and talk about selling for retirement, it's usually because they were under pressure from their family or spouse, who were encouraging them to sell the business and retire.  What I found from a lot of these people, is they weren't really motivated and accepting good offers from people because they actually didn't want to sell their business.

I found a change of heart somewhere around the age of 70 to 75.  I even had some people come in and finally decide to retire in their 80s.  If you meet a gentleman or a lady who is getting up in years and they around that 70 years of age mark, probably retirement is a real motivating reason why they might want to sell that business.

Some other legitimate reasons why people have tried to sell their business; re-location is increasingly becoming one of them.  So imagine a married couple, one spouse has a very high income job; maybe they are a doctor, lawyer, military officer, something like this, and they earn $150,000 a year let's say.  The other spouse owns a business and it's a good business, maybe only earn $70,000 or $80,000 a year.

The spouse with the job that earns much more, they might end up being transferred to another city.  When that happens, of course, the couple would like to stay together, so the business owner ends up putting the business up for sale so that they can join their spouse in the new city.

I once had clients where the spouse that had the job, ended up moving and lived in an apartment in the new city while in this case it was the wife who stayed behind for eight months, living in their house, trying to sell the house and trying to sell the business.  They wanted nothing more than to be back together but they had to sell the business, they just weren't willing to walk away from it.

Another reason why people sometime sell their business is because of health reasons.  They get diagnosed with a terrible illness and they don't want to leave their business to family members who may not be prepared to handle it.  These are very motivated sellers.  They want to get their affairs wrapped up so that no one in their family has to deal with the fall out of what could happen if they passed on before the business is sold.

I unfortunately have met several heirs, who were basically handed businesses when the owners passed away and these heirs were completely unprepared for the challenges of managing a business.  In a lot of cases, didn't even have much in the way of work experience, let alone managing a company and they were desperate in trying to sell the business before the inevitable was going to happen.  They were going to manage it into the ground, and they knew it.  They knew that the days were numbered and they were trying to sell it as quickly as possible.

The last reason why people sometimes want to sell a business is sort of a financial reason and the story goes like this.  This business has a lot of opportunity to grow but I don't have the resources and capital to take it to the next step.  So I need to sell the business to someone who has greater resources who can bring it to the next level.  That's what I call under capitalization reason for having to want to sell the business.

This is the one that you actually have to be afraid of, because usually there is a whole story tied up about what could become of the business if only there was other money available to invest and that is linking to what we call blue sky.  If you want to learn more about the dangers of blue sky when you are negotiating a business, then you should be taking my course, business buyer advantage which is available at BusinessBuyerAdvantage.com and of course, it's an entire program based on my full day seminar where I teach people step by step from beginning to end the process of financing, analyzing, making offers on structuring the deal for and executing the purchase on a small business.

So anyway, thanks a lot and Peter thanks for your question.  We'll talk with you later and don't forget to sign up for my e-mail list.  Thanks.

Hey!  You made it to the end of the video, that's great.  Don't forget visit www.investlocalbook.com.  Sign up for my e-mail list.  It's right down here under the welcome video.

Thanks and we will see you next time.

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