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The three reasons people sell their business.
The three reasons people sell their business.
By: KC Truby
The ideal situation, when we get too old or too bored to run our company is to have a manager step into our shoes, using the operations manual we wrote and take over. Allowing you to keep getting your checks every month for as long as you live.
In almost all cases the owner has to sell or close shop because the ideal situation never happens. As an owner we have not groomed our replacement nor have we ever taken the one hour a day over 2 to 5 years and written down everything we know about running a smooth operation.
The 3 reasons we sell
- It’s not making enough money.
Jay Abrahams (the marketing guru) once told me that the ONLY reason someone sells their business is because it is not making enough money. Well I agree that it’s a major reason but not the only one. However it is very rare to find a company that has infinite markets and infinite margins. Local business conditions, market size and competitors keep us from becoming a giant with money to throw away. There are not many Googles or Microsoft’s in the world.
So the bottom line is, most owners will sell when they realize that the business is not going to reach their goals and dreams. That is why you must take the comment “This is a great business and I hate to let it go but, ____________” with a grain of salt.
Also show caution when you hear about all the great potential income down the road that the current owner has just not had time to get to. If it was that great, they would have found time.
- The ceiling of complexity.
Now this is actually rare, most owners have no idea they have grown to the point of incompetence. It’s kind of like Dirty Harry saying “A man has to know his own limitations.” So we don’t know why we can’t get our company past 5 or 10 employees, or why finance seems to be a mystery, or employee problems won’t get solved. But the truth is, running the business has become so complex that it is no longer fun.
The danger here is the owner that knows a national chain is going to move in across the street and they have no idea how they’re going to stay in business. By the way, you will have to find that little secret out on your own.
The ‘ceiling of complexity’ seller are the ones most likely to pull out of your deal at the last minute. They are positive that if they could just do ‘this one more thing.’ Everything would turn around.
- Other interest are pulling them from the business.
This is what you’ll hear from business brokers. They all seem to say two things. The owner is selling because of retirement or other interest.
Be wary about the retirement line. In your due diligence find out what the future plans of the seller are. Is he moving out of town after retirement? If they say no, keep digging. Something else is probably pushing them out the door.
Other business interest. Get some clarity here. Go visit the other company and do some snooping with vendors and customers to find out if they are growing. If not, we should realize that something else is going on, and when you find that ‘something else’ you will be able to use it in your negotiations on the price you pay. Or if you even go forward with the deal at all.
Health. Now this is sad, but good news for us. A sick owner is not going to pull the plug halfway down the pike. They must sell and almost always they knew that a year or two ago and have been putting it off. Don’t be a jerk and try to steal this business. The employees and customers will resent you for it and sabotage your efforts to grow the profits. Be fair, be empathetic and only do the deal if it makes economic sense on all fronts. Never buy this business as a gesture of good will toward a sick owner.
Death. From time to time you will deal with the widow or brother of the owner as they try to settle the estate. These can be the most difficult companies to buy of all. Everyone is watching you to make sure you don’t screw over the widow, yet the company is falling apart by the hour as the owner did not leave behind a manager or written systems in almost all cases.
When dealing with all types of sellers I have found the best approach is to be kind, don’t say things that are not necessary and remember the word ‘Karma.’ An employee who thinks you stole the company will never say it to your face, but they will get even. Fair or not.