Since 2008, when the U.S. economy began its slump, a number of small business owners, who were ready to retire decided to hang on rather than offering their business for sale in a sluggish market. That made sense for a lot of people. They realized that buyers would be hesitant to take over a company that shows a decline in financial results because of the recession. And sellers understood that any offers they might receive were likely to be at unacceptably low prices.
The economy is doing much better now and that growth is reflected in the improved performance of many small businesses. Yet some of those sellers aren’t taking advantage of the growth trends in the economy and the resulting increase in the values of their companies. There are three main reasons some sellers still are reluctant to find a buyer and enjoy the financial results of a sale.
1. Betting on continued growth: The rationale behind this reason an owner might not be ready to sell is the idea that if the company has grown so well in the past several months, it means that the growth trend will continue. And that means the business will be worth substantially more in six months and will continue to gain in value into the foreseeable future.
The problem with this reasoning is the risk that another slowdown might be coming in the near future. If your retail business has begun to pick up after several months of declining sales, you might be tempted to sit back and watch new customers come through the door, bringing an increase in gross sales and improvement in owner's discretionary earnings. The comforting idea along this line of thought is that the more discretionary income is available for the owner, the higher the price of the business. The fear is that the company would be sold "too soon." A seller in this situation might worry that if the sale were to happen in the near future, he or she would regret selling at a price that is lower than might have been achieved after waiting another year or so. The fear of "leaving money on the table" is the motivation behind a number of business decisions that don’t yield the desired results. Instead of worrying about the possibility of getting less than the maximum price, the seller might be smart to consider another possible outcome - that the business could encounter one or more of the many circumstances that could quickly cause a reversal of fortune and a decline in its value and desirability.
2. Want to enjoy the current level of income: Regardless of how much an increase in business hikes the value and sale price of the company, a company owner may be pleased to continue answering the phone from customers and responding to growing online orders for what his or her company offers. After months of worrying about whether revenues will be sufficient to pay all expenses and leave a decent profit for the company’s investors, it's a very satisfying experience to see the positive direction of the income line on the business performance chart. The last thing the owner wants to do when the business is producing more income is sell the company and end the enjoyment of seeing it continue to produce more profit.
But like the owner who wants to hang on with the idea that the business will continue to increase in value, the owner who wants to collect every dollar available as long as business is so good, might find that changes in the business climate or other unexpected circumstances can quickly turn what was a growth trend in the opposite direction.
3. Trying to "game" the timing of the sale: I've talked to a number of owners who have watched their businesses go through up and down cycles over the years and are convinced they can time a sale to their advantage. Their plan is to put the company on the market right before the end of a growth period and before revenues and earnings begin to decline. But some of these people have learned that even if they think they can predict the impact of economic cycles on the performance of their businesses, they can't forecast all factors that might influence the value of the company. If a powerful competitor moves into the area, a key employee resigns or an unhappy customer brings a lawsuit, possible buyers might suddenly lose interest. Or they’ll delay making a decision about submitting an offer, waiting to see the consequences of these new events.
It is understandable why a seller would want to hang on to a business that is doing well, even if he or she has strong personal reasons for wanting to sell. The mistake some sellers make, however, is when they try to get the full benefit of the company's growth, and to sell at the best conceivable price. In most cases, the seller with this mind set is simply betting on the right time to sell. I usually recommend that people watching their businesses improve and wondering when to offer them for sale would be smart to consider that there may be no better time than the present.
#photo#About This Contributor: Peter Siegel, MBA is the Founder & Senior Advisor (ProBuy & ProSell Programs) at BizBen.com (established 1994, 8000+ California businesses for sale, 500 new & refreshed postings/posts daily) working with business buyers, business owners/sellers, business brokers, agents, investors, & advisors). Phone him at 925-785-3118 to discuss strategies regarding buying, selling, (or financing a puchase of) California businesses.
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