Compelling Reasons for Buyers / Seller Motivation
TVG has spoken with literally thousands of buyers over the years, asking them why they were interested in venturing into business ownership.
As former business owners and intermediaries counseling buyers, we have been in a position to take our own polls concerning buyers’ motivations. Although there have been many different answers, there are some basic motivations that continually reappear. It is our opinion that a short discussion relative to these motives can help put matters into perspective.
1. Controlling One’s Own Destiny
We have discovered that prospective buyers want to control their own destiny and perhaps the strongest motivation for those venturing out of Corporate America into the ranks of business ownership. As we question if this is a well-informed reason for buying; the idea of controlling your own future is largely a matter of perception. An example, many buyers believe that owning their own business means that the sky will be the limit because they are now free to go as far as their personal abilities will take them. While a seemingly unlimited profit ceiling might be a good motivator, many would-be owners overlook the many limiting factors on small business ownership. We find that by owning a business, not only does one bring his old set of problems with him, but he also inherits a new set of problems. There is nothing wrong with venturing into business ownership as long as a prospective buyer does a realistic assessment of his motivations.
2. Financial Reward
When buying a business, there should always be a balance between risk and reward. There is without doubt monetary reward in owning your own business. The lure of making substantial wealth attracts some buyers to the acquisition market. Many buyers have made a lot of money for their employers and now want to make that money for themselves. The prospective buyer needs to be realistic with the risk/reward proposition. Both sides of this equation need to be deliberated before starting the acquisition process. Buyers must understand that as an entrepreneur, owners get paid last.
3. Being the Person in Charge
Prospective buyers often mention that they are tired of being under the microscope, having a boss looking over their shoulder. The lure of not having a boss in business ownership is synonymous with controlling your destiny. In reality, the small business owner finds himself working for many bosses. Customers frequently tell the owner when and how high to jump. The small business owner sometimes ends up being the subordinate to the customer. In addition, lenders can seem like a boss dictating how things are to bed one. Perhaps the perception, that you have the ability to walk away when you want that is so appealing. The end result is that the obligation to earn a profit and stay afloat wins out over personal control of the owner’s workweek or independence.
4. Ability to Use Personal Skill Sets
Buyers have expressed that owning their own business will allow them to demonstrate their true abilities. Many displaced executives coming out of Corporate America feel they have certain abilities that will raise the business to the next level. It is equally important to look at the abilities that have been required of the existing owner to get the business to its current position. This experience, or the lack thereof, can be a key determinant of ownership success. In operating a business, an owner might find himself dealing with company management one minute, and delivery drivers the next.
5. Seller Motivation
A lack of seller motivation, as much as any other reason, can cause deals to fail. As intermediaries, we have found it absolutely imperative that we know precisely why a business owner is selling. Many buyers are skeptical of seller motivation and with good reason. It is understandable why many buyers question the sellers’ motivations. There are many other acceptable reasons why sellers enter the marketplace for their businesses.
6. Why Companies Are for Sale
A business owner can spend his entire career developing a business until it becomes his baby. Selling can be the most difficult and emotional decision a business owner will ever make. It is filled with emotions similar to sending a child off to college or giving a daughter away at her wedding. The timing and reasons for selling must be right, and the reason for selling should be paramount to a prospective buyer. A buyer needs to be assured that the reason for selling is not due to negative factors such as problems in the industry, increased competition, or employee problems.
Burnout / Boredom
A business owner can lose his passion for the business, dread going to the office and cannot wait to leave. Burnout and boredom are the most common reasons for an owner selling his business. If sales have flattened or started to decline, employee morale, customer service, and/or supplier relations may have deteriorated.
At some point in life, the time comes to reap the benefits of years of hard work. This is another common reason for sale in the business transfer industry. From a buyer’s perspective, this is the most justifiable reason for sale, which creates a comfort level when analyzing a business. If the owner does not have heirs to pass the business to, he is faced with the prospect of selling.
Health is a very unfortunate reason for selling because it is usually out of the business owner’s control. Often, the sale has to be quick because of a decline in sales and a void of top decision-making due to less time being spent at the business by the owner.
Lack of operating capital / Need for growth capital If it were not for capital concerns, many business owners might never sell. There comes a point when the continued worry of funding accounts receivable, payroll, or the rent will push a business owner over the edge. A business can actually become harder to handle financially with increasing sales even though there is more money generated by the business.
To know the future of an industry, it helps if you have a crystal ball handy. If the industry is heading in a bad direction, business owners start contemplating a sale. It would be unwise to suggest that every time an industry dip or change occurs that an owner should think about selling, but a management style that has proven successful in one climate may be challenged in another.
Sales / Cash-flow
It might not be an overstatement to say that in buying and selling small businesses, “Cash flow is king.” The main scenarios when cash flow is not “king” is when the assets are the only value of the company or if a competitor is just looking at your clientele. When analyzing a business, prospective buyers and lenders key in on even the slightest slip in annual revenue and cash flow.
There are times when a business owner is approached to sell his business for an inflated value even though the business is not on the market. Many business owners will take advantage of this opportunity if the price is right. Motivation is an important issue on both sides of the equation: buyer and seller. It is important for the buyer to take a personal assessment of not only his own motivations but also that of the seller with whom he intends to work.