We have 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.Controlling One’s Own Destiny
Prospective buyers frequently mention that they want to control their own destiny. We have discovered that this is perhaps the strongest motivation for those venturing out of Corporate America into the ranks of business ownership. We question if this is a well-informed reason for buying; the idea of controlling your own future is largely a matter of perception.
For 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. Primarily, limited financial resources hinder most owners because obtaining additional funding is a difficult task. In addition, hidden factors such as timing, industry position, and lack of suitable labor can have more of an impact than a new owner’s entrepreneurial abilities. Many seasoned business owners attribute their success to a significant amount of luck mixed in with their managerial expertise.
We suspect that many coming out of Corporate America venturing into business ownership merely trade one set of problems for another, much the same as people changing one corporate job for another in the hopes of leaving their business problems behind. 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.
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. 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. Time and again as intermediaries we have seen true wealth accumulated by the business owner. It can, in fact, be argued that the only way to accumulate true wealth is through business ownership.
As in most other situations, if there is reward, there certainly is risk. Even business owners that have accumulated wealth and are selling their “cash cows” would not want to owner finance for this reason. Sellers know how important luck and timing can play in successful ownership. Not only does an owner have to have the complimentary skill sets needed for running the company, he also needs the luck of having a forgiving economy and the right time to get in to the right industry and business play key elements. 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.
If a small business owner gets into financial trouble, he may find himself all alone with significant debt. There are no friendly bankers when you get in trouble; bankers are businessmen that have, as their first obligation, the protection of their depositors. Digging yourself out of a hole as a small business owner can be a long and tough journey. At the risk of being negative, the number of annual bankruptcies of small businesses can be a touch of reality.
With respect to the risks involved, we have seen successful, experienced business owners expand into a different territory, only to fall victim to poor timing and fail. At the same time, we have also seen first-time buyers with average skill sets and little experience take the plunge and have huge success. As in any venture in life, being successful in business ownership requires a certain amount of good luck and attitude.
Being the Person in Charge
Purchasers also point to the lure of being their own boss. 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 be done. Furthermore, it is sometimes difficult for the business owner to ascertain if he is working for his key employees and suppliers, or if they are working for him. Again, the prospect of having no superior gives only the illusion of not having a boss.
As in not having a boss, the lure of being independent and in control of your own time appeals to some buyers. It is true that when you own your own business you can decide if you don’t want to come to work on any given day. It is true that as a business owner you are not punching a clock or having a boss looking over your shoulder and can go home in the middle of the afternoon. But most experienced owners have found that in reality, they end up working over 40 hours a week, frequently work nights and sometimes weekends just to get the job done. Perhaps it is the idea, 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.
Ability to Use Personal Skill Sets
Buyers have expressed to us that owning their own business will allow them to demonstrate their true abilities. Controlling your own destiny through ownership experience will be commensurate to your own ability to successfully run the business enterprise. 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. Business ownership often requires abilities that run the gamut. Many ownership situations require the skill set of a generalist more than the special skills the buyer has honed through years of corporate work.
For example, a new owner may find himself required to work with employees of varied skill and educational levels. The corporate executive may have interaction experience with his peers but little management experience, and the management experience will probably be specific to a certain level of subordinate. 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. In counseling with business owners over the years, dealing with employees is a key reason for burnout and the leading reason business owners sell.
We realize that this chapter’s discussion on buyer motivation has had a negative spin. Our objective has been to have the prospective buyer consider both sides of the more common reasons that buyers buy. On the positive side, we have interviewed many business owners that have amassed true wealth through their ownership interests. Their experience in owning a business has been a very positive part of their lives.
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. Many businesses are poised to go down the tubes and, as such, are the primary reasons many sellers try to sell. It is understandable why many buyers question the sellers’ motivations. Intermediaries often waste valuable time trying to work with an unmotivated seller.
There are many other acceptable reasons why sellers enter the marketplace for their businesses. We feel a short analysis of these common reasons can aid the perspective buyer in identifying these situations as they appear.
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. We have had many owners tell us they are waiting for the best time to sell. The problem is that no one can ever predict when that time will be, unless they have a crystal ball and can predict the future. The following factors are the most common selling factors for a business owner:
Burnout / Boredom
A business owner can lose his passion for the business, hate to go to the office and cannot wait to leave. Burnout and boredom are the most common reasons for an owner selling his business. Many businesses that have flattened sales for two or three consecutive years reflect an owner that could work harder to drive the business upward but has lost the passion to do so. 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. On the other hand, a prospective buyer will feel more comfortable with this scenario. Structuring a deal for a quick sale due to the owner’s health does not have to be for a lower price. A seller can set up a low down payment and a longer owner note, which will keep the sale price at the highest justifiable level while getting the owner out quickly.
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. There is also the dilemma of growing a business to its maximum point and not being able to go beyond it due to a lack of funding or managerial ability. A business owner will say to himself, “If I just had some more capital I could do X, Y and Z and double the business.” Many owners that we have represented have reached a comfort level in their operations and do not want or feel comfortable with investing more capital to get the business to the next level. This is similar to burnout and many times the business will flatten out due to a lack of motivation.
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
We will discuss the importance of cash flow in more detail in a subsequent chapter. 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. Even an annual dip as small as 2 percent will cause a buyer and lender to start wondering if there are significant problems in the business. We have sold businesses with a drop in sales for two and three consecutive years, but the final negotiated sale price suffered as a result.
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.
As in other aspects of life, psychology also takes a front seat in the transfer process. 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. After a careful understanding of motivations established on both sides of the equation, a buyer is much better prepared to successfully traverse the minefield of business acquisition.
Vantarakis, Alexander and Whitehurst, William. ENTRANCE.