Quite often people will ask us as business brokers “Why is the vendors selling the business?” This question often comes when the business being sold is profitable. It has real relevance these days where economic uncertainty suggests that if you have a profitable business you would only sell it if you were retiring and there was no obvious successor within the family. What they are really asking is “Is there something wrong with the business?”
At the outset I want to stress two things to you as a business buyer. Firstly, whatever you are told is the reason for sale, don’t let that sway your attitude to the business purchase. Secondly, do your own investigation as to what the future of the business is and what impact the vendor’s exit from the business will have. So let’s find out why someone would sell a successful business as we look at all the major reasons people give us as to why they are selling their business.
Reason 1 – I have had enough – (I’m Tired)
If a vendor has run a profitable business for a number of years it can take its toll. The long hours, time without family, stress, financial struggle and a multitude of other reasons can leave the business owner exhausted and with no alternative but to sell. I once talked to one of Sydney’s most successful restauranteurs. He told me how he offered his son one of his expensive restaurants for free. “just take it over and run it, don’t pay me a cent son”, he had told his son. He even simulated handing keys across a table to his son as though his son was there in the room. I saw the keys come back towards the restauranteur, as he told me that his son rejected the offer, saying “dad I don’t want the life that you had, late nights never seeing your family. It is not a lot for me”
It is easy for a business buyer to say “I know how to run this. I’m better than the current owner” It is easy to say, but not that easy to do. The business might treat you the same as it has treated the current owner. Why are you going to do any better? Your success in this scenario will depend on your skill, obviously, but also on how much time you devote to planning “how you are going to do any better”
Reason 2 – I just want the money (Cashing in)
Some vendors just want to cash in. They may think that the business has hit its peak and that now is the perfect time to sell. Every business has its cycle (industry cycle) and there are many other cycles that affect the business including the economic cycle and the lifestyle cycle. You don’t want to be buying at the real peak of the business when there is no room left for you to improve it. Determining if it is a good time to buy will take estimation by you, as well as some crystal-balling, but if you don’t do it, you will be in a much worse position than if you do at least try.
Reason 3 – I am leaving the area (Lifestyle choice)
Some owners just want to sell up and go live somewhere else. They are prepared to forego the profit they are making and they won’t let their lifestyle choice be changed for economic reasons. This is usually a legitimate reason for sale. People living in cities in Australia, can usually get good money for their houses and take that excess money to an area where housing is cheaper, looking forward to a happy lifestyle in the more relaxed environment.
Reason 4 – I don’t have the money to go on and develop the potential. (I’ve tried)
This reason for sale would not convince me if I was looking to buy such a business. There is a suggestion that the business is not as successful as it could be and only needs injection of funds to grow – by marketing or some other development initiative. There is always risk in spending money in a new business when you have no history yourself, trying to develop the business by marketing or other means. Will the business necessarily improve with the injection of marketing funds and effort. You must research this question to the best of your ability.
Reason 5 – Retirement (I’m out of here)
When a vendor quotes this reason for sale and it looks to be genuine, buyers immediately relax because it appears to rebut the suggestion that there might be “something wrong” with the business. You need to take care here. What is retirement anyway? Whilst retirement used to be the age of 65, these days people seem to be staying longer in their business. Retirement is more a matter of lifestyle dictates rather than chronological age.
Reason 6 – I can’t take the business any further (I’m not good enough)
This is often the reason given when actually the truth is that the business simply has a poor future. The question for you as a buyer is whether this is related to the business itself or just the current owner. You may get value by the business such as this, but will get your fingers burnt if the problem is inherent in the business rather than how it’s been currently operated by the owner. Your due diligence, if conducted thoroughly, will uncover any areas of concern.
Reason 7 – I have a new venture.
Sometimes this is the genuine reason for sale and we have acted for many vendors who have gone on to create better businesses than the ones they just sold. Many vendors sell franchises because they don’t need the support of the franchise or anymore. They have been taught so much within a franchise system that they can go out and repeat success in the marketplace without having to pay a franchise fee.
On other occasions, we have seen vendors who have learnt something from their current business which will be a springboard to success in a future venture. One such vendor had a hire business and in the meantime learned a lot about Google marketing to grow that business. Once we sold the hhire business, that person went on to build a very successful Google marketing business. The vendor had a genuine reason to sell and the buyer of the hire business also did very well, continuing to grow it.
Some business owners suffer from “founder” syndrome. The starter of a business quite often can’t finish the job. They get bored and are always on the lookout for the “next new venture” which will excite them and satisfy them. The question for you here is whether you can finish the job that the founder could not. When investors come to a business and seek to corporatise it, one of the first moves is to work out when the vendor will exit after there has been a transfer of knowledge and a transfer of the benefit of relationships.
Reason 8 – I am sick. (Or maybe just sick of it!)
Often this can be a genuine reason for sale. I have, however, seen such a reason to be invented by vendors to create sympathy or simply hide the real reason for sale. You should spend no time investigating the vendor’s health or accepting this as the reason for sale. Spend all your time on investigation and due diligence.
Summary: In summary, do your due diligence and remember one thing. The owner of the business has often run it for many years. They know it and the industry and the competition inside out. They probably know more than you. Make sure you level the playing field as much as possible. By the time you purchase the business, you may not know as much as the vendor, but at least make sure that you know enough about the business, the industry, the economy and the competition so that you can form an educated opinion as to your prospects of success.
Please share this article so that as many business owners as possible can make a success of their business purchase. Business success is elusive enough without people making decisions based on false premises.
Tony Arena
Owner @ BCI Business Brokers, 30 years of experience in selling businesses
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