Owners Must Answer the 4 W's (Who, What, Why, When) Before Deciding to Sell Their Business

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By John Herubin,
Managing Director

It is well-publicized that the merger and acquisition market has recovered to near pre-recession levels and that it is a proverbial “sellers’ market.”  Many external factors influence this increased buying activity—including low interest rates, increased availability of bank lending, historically low capital-gains tax rates, and abundant capital held by a large number of strategic and financial buyers. A business owner must answer four critical questions regarding their personal goals and objectives (internal factors), before embarking on a path to capitalize on these favorable market dynamics.

The 1st “W” – Why am I selling?

This answer varies with each owner we advise, but several common themes often appear when an owner begins strongly considering their business exit. The reasons include the following:

  • Owner has reached an age at which they have limited energy to continue running the business and believe it is time to retire. 
  • Cash from a sale is needed to fund a comfortable retirement.
  • Owner desires a different or better quality of life than what they perceive they experience in their current role.
  • Fear that the industry is consolidating and that delay could miss the consolidation trend and window of opportunity to sell.
  • Owner realizes they missed the last “sellers’ market” and do not want to remain active in the business during the next down cycle.
  • Desire to preserve the legacy and goodwill the business and family name have established with employees and the community.
  • Owner or family illness or crisis.

This particular question often generates intense emotions and anxiety for the owner. We see the owners best prepared to answer this question are those who have communicated these emotions with the people around them that can provide honest and objective feedback. The sooner an owner begins acknowledging and confronting these emotions, the greater the prospect they will make an informed decision to sell, and be more comfortable with the outcome. This awareness process is often enhanced by speaking with close family members, trusted advisors inside and outside the business, and business peers.  

The 2nd “W” – What am I selling?

When contemplating a sale, owners need to decide if the sale will entail all or a portion of their business. A portion may include the following:

  • certain divisions
  • the core business
  • real estate
  • intellectual property  
  • a specific geographic location

A corollary to this question is determining what form the sale’s consummation will take.  Generally, working with trusted professional advisors helps an owner decide—depending on what is being sold and how it is owned—whether a sale of stock, assets, license agreement, joint venture, or lease is preferable. These professionals often include an experienced deal attorney, investment banker, accountant, financial advisor, and insurance representative. Myriad tax, legal, personal financial, and estate planning implications arise, based on what is sold. 

The 3rd “W” – Who do I sell to?

Today’s frothy market conditions provide a plethora of options for an owner to consider. Historically, the most obvious buyer choice was a direct competitor. Today, options also include many private equity or financial buyers flush with cash. A newer and growing participant competing to buy companies is the family office. These groups represent a family or group of families that may have previously sold a business, and seek to increase yield on sale proceeds by buying another company. Also, many international companies seek growth in the U.S. through acquisition, and are active competitive buyers.

Based on the answers to the 1st “W” above, a qualified buyer may also include the owner’s key managers or employees, or possibly the broader universe of employees through an Employee Stock Ownership Plan (ESOP). 

Each buyer group’s investment and management style, goals, and results can influence which buyer is best pursued to meet the owners’ transition goals and objectives. Again, the owners trusted advisory team can provide input from experience to assist in determining buyers to target in a sale process. 

The 4th “W” – When do I sell?

For owners inclined to sell (owner readiness), this is the easiest question to resolve. As discussed above, today’s market timing is as favorable as it was pre-recession. Many owners do not want to live through another downturn and are seizing the moment to market their companies for sale. Another factor indicating that now is a great time to consider a sale is the number and frequency of unsolicited and preemptive offers owners receive. This validates our sense that buyers are abundant and sellers are few.. When this imbalance will end is currently unclear. As we have seen in past cycles, it is not always easy to predict what external events impact markets. 

Careful consideration joined with trusted advisor consultation will help answer the 4 “W”s above, enhance the chances of a successful sale transaction, and achieve the best “W” of all—one in the win column!

© Copyrighted by EdgePoint. John Herubin can be reached at 216-342-5865 or via email at jherubin@edgepoint.com.

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