Diagnosing the “Symptoms” of a Ready Business Seller
By John F. Herubin,
Our team at EdgePoint has advised and consulted with thousands of business owners throughout our combined careers in preparation for a potential sale. We have guided hundreds of these owners through a marketing and sale process to a successful conclusion. Having accumulated this wealth of experience from interviewing all these owners, we are often asked how we know during our discussions when a business owner is ready to commit to sell their business.
Much like a physician prior to an examination, we ask a series of questions of a prospective seller. Based on our extensive experience, the three high-level questions we ask to determine readiness are whether the market, the business, and the owner are ready.
The easiest question of the three to answer in today’s merger and acquisition environment is whether the market is ready. By almost every measurable metric, with limited exceptions, we have not seen a more favorable seller’s market for at least 20 years. The abundance of investable cash (through private equity, strategic buyers, and family offices), a favorable bank lending environment, historically low tax rates, a plethora of buyers, a positive business climate, and a dearth of quality sellers, have combined to create a favorable “perfect storm” for sellers.
The second question of whether the business is ready is more specific to each individual circumstance. Making this determination is also more quantitative and measurable. Organizing and optimizing areas of the company that will positively impact value include operational, financial, legal, tax, and sales and marketing functions. For example, we can assess and determine whether hiring a key employee or buying a new piece of equipment prior to sale will create quantifiable value. We can also espouse the benefits of upgrading financial statements, identifying key employees, and cleaning up obsolete inventory prior to a sale process. Once the decision to undertake and implement these actions is completed, the answer to our second question is also “yes”.
The third, and most subjective assessment our “diagnosis” entails, is determining whether the owner is ready. There are many emotional, personal, financial, family, employee, community, and legacy related considerations for owners to consider before committing to a sale. Our many discussions over the years have educated us, much like a physician, to listen for specific clues or “symptoms” that we hear often which will lead to a “diagnosis” that the owner appears ready to sell.
We repeatedly hear the following “symptoms” which often indicate that an owner is ready:
- “I’m Tired”– this owner often started the business and it has grown over the years to where their daily responsibilities and activities have outgrown their capabilities to manage the operations. They are also fatigued from navigating the economic cycles of their business. They feel “stuck” and are often unaware of the sale options available in today’s market to provide them resources to alleviate their burdens.
- “This is not as much fun as it used to be”– this owner/founder started out as an engineer and loved tinkering with their product, liked working on the shop floor to create products, or liked sales and managing customer relationships. As the business has grown, their responsibilities have expanded to include HR, international sales, increased regulations and legal complexities, e-commerce, etc. The business has become more complicated and they yearn for a situation that will enable them to continue doing more of what they most enjoy. Again, they are unaware of the many sale options that will enable them to achieve this goal.
- “My Mom and Dad worked hard to grow this business, but I don’t have the same emotional equity invested that they did”– this owner often knows today’s M&A market is active, and they are intrigued by a potential liquidity event. They might have younger children or interests outside the business that their parents did not. A sale would enable them to pursue these other interests. They are also concerned about maintaining employees and their family legacy in the community.
- “I take several weeks off every winter down south and the business still runs without me”– this owner has oftentimes created a strong management team that enables the business to operate without their daily input. This owner may desire to de-risk the concentration of their wealth in the company through a sale process. A strong management team will likely be an attractive attribute to potential buyers.
Ironically, we have found that age is not necessarily a key “symptom” that indicates readiness. The average age of our sell side clients over the past five years is 54 years old. We are currently representing owners in their 30’s and trying to discern the readiness of owners in their 80’s who are still engaged and having “fun”.
Although not an exact science, there are many additional factors that we assess once we complete our initial discussions with owners. As investment banking “doctors” the above “symptoms”, which we repeatedly hear, often affirm our initial diagnosis of a “ready” seller.