Why Owners Wait to Sell Their Business
By Tom Zucker,
During my thousands of conversations with closely-held business owners over the years, the most frequent question they ask is when to sell their business. Nowadays, nearly every M&A professional heralds the positive attributes of the market as an ideal time to sell a business. Low interest rates, favorable capital gains tax rates, business confidence, and demand pursuing acquisitions are just a few indicators that now may be a good time to sell. From a purely financial perspective, the decision to sell seems like an easy one. Unfortunately, for M&A advisors, the answer to the question of when to sell is not always so easy. Selling a family-owned business often involves a multitude of emotions, and other reasons that are often much more important to resolve than the financial considerations.
Based on more than two decades of advising closely held business owners, conversations around three distinct themes may help clarify emotional or non-financial factors to determine “when” is the optimal time: (1) defining what comes next; (2) determining whether the next generation is ready; and (3) identifying unfinished business.
Defining What Comes Next
A business owner’s position in the company and his or her life purpose often intertwine. To be sure, decades of leading a private company, and receiving accolades and prestige for one’s business accomplishments, is alluring. Countless books and seminars have addressed the idea of defining a compelling future and vision for the second half of one’s life. Unfortunately, many business owners missed those seminars and never read the right books. They were too busy growing and operating their business. The emotional preparation required of owners and their families for life after business ownership is a significant weakness of many business owners’ planning process. Without a compelling future to pursue, the decision to sell becomes strictly a monetary decision, which comes with the risk of disrupting a delicate family, emotional, and life balance.
I recall a conversation with the owner of a precision machining business. He founded the business in his mid-fifties, following a successful career at a similar business. In addition to building an outstanding business, the owner’s religious faith was the foundation of his business and personal life. For several years, his financial advisor had explored and clarified his charitable interests and post-ownership desires. In the owner’s final decades, he wanted to focus on his church and his family. The construction of a new chapel and establishment of missionary trips was his objective. He also wanted to help unify his family by funding exciting family vacations with the extended family. Hardly earth shattering, but for him it was clear, well defined and aligned with his values. I revisited with him a decade after he sold his business, then entering his eighties, and he reflected on his time in business and afterward. He shared with me that his family was stronger than ever and that the proceeds from the sale of his business helped to fund many missionary trips and even a multi-million-dollar chapel for his church. He was truly fulfilled and satisfied with his past decade and spoke with excitement about the future. He shared with me something that he hoped I would share with others: that he wished he had sold his business sooner. His years following the sale were more fulfilling than any other part of his life, and he realized that the value he needed to fulfill his objectives was far less than the overly conservative estimates. His prior planning enabled him to pursue this path with greater confidence.
Determining Whether the Next Generation is Ready
The desire to transition one’s business to the next generation is compelling and often-desired outcome for a business owner. The education, training, and experience required to prepare the next generation for owning and leading the business can seem daunting. Unlike the previous generation, the children of business owners are less willing and capable to assume the leadership role. Further, many children today would prefer jobs in more glamorous industries. An unprepared son or daughter is often a reality for business owners who hope their children will run the business in the future.
We assisted one business owner on his journey as he faced this transition issue. His son, then in his late twenties, had pursued a career in an industry outside of the family business. After several years, the father persuaded the son to return home and join the family business. The son quickly learned the lesson that respect is earned and not given. The son’s progress was not conforming with the owner’s timetable. After reviewing the owner’s options with him, we decided that a minority recapitalization with a financial buyer (i.e., a private equity group) would achieve the desired liquidity while also providing a group of skilled business operators and a formal corporate structure to assist in his son’s development. The recapitalization was a success; the father received enough capital to satisfy his retirement goals and, with guidance from the new partners, the son advanced into a skilled business operator and successfully repurchased full ownership seven years later.
Identifying Unfinished Business
For owners, the ability to grow a business to a certain revenue level, achieve a targeted sell price, or reach another qualitative goal are just a few achievements that justify waiting to sell the business. Whether it is pride, ego, or simply a drive to excel, these reasons are often important to a business owner and can delay or obscure the best time to pursue a sale.
I vividly recall a conversation with a chemical distributor about a decade ago. Although the business was performing well and the M&A market was attractive, the owner was not ready to sell, citing unfinished business. Puzzled, I inquired further as to what was left to accomplish. He shared a conversation with his former employer about the day that he left to start his own company. In his parting words to his former boss, he exclaimed, “I will grow my business to be larger than yours!” This emotional promise to his former employer served as a motivational driver throughout the history of his company. When I spoke to him, his company’s revenue was within $5 million of exceeding his goal. He decided to wait to sell his business in the fall of 2007, based upon this emotional rationale. Unfortunately, the recession hit his industry hard and his business and leadership teams were unequipped to handle the tumultuous ride. The company filed for bankruptcy protection two years later, and he was out of business just a short time later. The bitter lesson illustrates how sometimes emotional or non-analytical goals are obstacles to properly timing a sale.
These stories illustrate just a few of the non-financial considerations that owners face when making the decision to sell their business. From the self-actualized owner to the prideful and bankrupt owner, it is evident that a skilled advisory team is necessary to navigate these risky waters.