In addition to understanding the business buyer persona, It is also important to understand a business owners motivation to sell a business. Business owners put in a of time, sweat and equity into building a business. Therefore, selling a business is could be an emotional experience for the seller. Businesses are sold for several reasons and similar to understanding the buyer persona, understanding the reason behind the sale can go a long way with negotiations and structuring the business deal. Regardless of determining the business buyer type and reason to sell, business valuation is the most important element for setting the price. Business valuation is pivotal and both the business buyer and business seller must get the business values, preferably using an independent business valuation professional. Additionally, both parties must use multiple valuation techniques to determine the intrinsic value of a business. Now that we have emphasized the importance of business valuation, the following are the most important reasons businesses are sold:
Many business owners are in the demographic that will soon be retiring. As per US and Canadian statistics agencies, more than 20% of the population will be over 65 by 2026. For Baby Boomers (people born between 1946 and 1964) business owners, selling their business is the most popular exit strategy to retire. As a business owner, there may be a glut of businesses coming to the market, which is good news for business buyers but may reduce valuation for business sellers.
Business owner fatigue and burnout is the most common reason a business is sold. Additionally, business owners who have owned and operated their business for several years are also bored by the businesses operations. Restaurants, Coffee shops are examples of businesses that may be profitable with potential for growth but the business owner may be selling because of boredom.
Personal and Family Problems
Major changes in a business owner’s personal or family life can be an important reason to sell a business. For example, the business owners spouse or kids may be relocating. Divorce may be another reason to seek a business exit.
Majority of a business owners wealth is tied up in one company. A business owner may sell a part or all of his company to diversify. A balanced portfolio is a critical risk mitigation strategy.
The business owner may have found other businesses to pursue that have higher growth rates or profitability.
The old adage “Everything is for sale at the right price” applies to businesses as well. A strategic buyer may be willing to pay a premium for a business to gain from synergies, eliminating competition, gaining market share or several other reasons. For the business owner it is an opportunity to capitalize their hard work for a premium.
The business may be struggling because of competitive threats. In many cases a business has been around for several years and has not innovated. In many cases business owners may exit the business, which creates a good opportunity for business buyers if they can turn the business around.
Business valuation is the most important criteria to determine the transaction price. Assuming costs are constant, valuation is directly proportional to revenue, earnings and cash flow – depending on the valuation technique used. When the economy is strong, businesses have the highest valuation and it is a good time to exit. The best time to sell a business is when a business has been up for three years and the best time buy a business is in the third year of an economic downturn.
Lack of vision
Perhaps the worst reason to sell a business if lack or vision. In many cases business owners go instant gratification and losing out on long-term growth from the business.