You may have seen the above chart or something similar. It illustrates the lifecycle of typical businesses. The shape itself may vary, but in general the message is the same; small revenue in the early days of the life of the business, building it up over time, and then stability, growth or decline.
The focus here is on small businesses, owner operated, with or without a management structure in place. The person running the business is largely responsible for its performance. As he reaches his level of comfort, he can stay at that level for a long time, many do.
If the owner is not intent on growth, at some point the business is likely to decline. This may be due to obsolescence, owner being tired of the business, external circumstances, or owner retiring. The business will end-up being sold or liquidated.
If the owner intends to grow the business, he may decide to expand by adding products and services, enter other markets, acquire complementary businesses. Or, he may decide to merge with, or be acquired by a larger enterprise with greater market reach, and/or greater availability of capital.
Have you considered the way in which your business will transition at some point in the future?
Read on, and see how some owners have gone through that process in this very important milestone.
In my Business Brokerage activities, I normally become involved with business owners whose business is at or near the point of transition. The sale of the business being the primary objective. However the sale does not necessarily materialize in every case. Here are 7 examples of what may happen, taken from some of my deals.
- The owner had an unrealistic firm asking price. He was unmoved by the buyer increasing his offer at different meetings, to almost twice what the business was worth. The buyer finally gave up. Paying a high price did not make sense for him. The business was unsold. Subsequently the son of the owner took over the business and continued running it. The life of the business continued at the same level as before, but in different hands.
- Similar situation as number 1 above. In this case, the owner eventually hired a competent person to manage the daily operation of the business. By so doing, he kept ownership of the business, and had more time in his hands to devote himself to other activities that he was engaged in.
- The owner had a high price for the business. The previous 3 years showed significant growth, so the Buyer was interested on the premise that this was an indication of real growth, not simply the business having a couple of good years. As it turned out, upon revision of the work in progress and orders in the books for the current year, it became evident that sales would in fact drop by 30% compared to the previous year. This did not meet the buyer’s conditions. The Seller would not reduce the price. Consequently the deal died. The owner kept running the business. No problem for him though. He had a son working at the business who could eventually take it over at some point in the future.
- Another case of high price expectation on the part of the Seller. Business was in a declining phase. The owner was expecting significant amount for goodwill due to his large client base and the decades he had been in business. It mattered little to him that his business was losing money. Several buyers expressed interest. Some of the physical assets (machinery and equipment) were of interested to them, but not the amount of good will sought by the Seller. The business did not sell as an operating entity. The physical assets were eventually sold by auction, and the business closed. The owner went off to become a consultant in his trade, where he had substantial experience.
- High price, asset rich, manufacturing business, steel structures, profitable. Owner motivation was low. Business did not sell. As it turned out, the owner realized that growth was the best path forward for his business. He embarked on a growth path and subsequently the business became 5 times bigger in a few years. He bought more Real Estate to accommodate current growth and future planned expansion. Big plans, good for him.
- Another successful transition. Owner retiring. Business highly profitable. Technology business. Management structure in place. Manufacturer of custom automated testing equipment. Been in business for decades. Started plans for eventual transition 10 years earlier. Could not sell the business during that time. It was highly technical and required the right type of buyer to acquire the business. I introduced six buyers capable of buying the business. Eventually the owner decided to sell the business to the buyer who had the best technical, financial and marketing ability to operate the business successfully. Within 4 years after the sale, the business doubled in size.
- Another case of successful transition. Owner retiring, and in bad health. Technical business, manufacturing, aerospace industry. Business volume was in significant decline, with little or no profit. Had an excellent prime customer, and substantial equipment. Thirty buyers came to see the business. Eventually it was sold to a relatively new enterprise. This was a Buyer, operating in the same industry, who was intent on growing fast by acquiring other businesses. Growth by acquisition was his game.
These stories are not unique. They are examples of real life small business transition. So it is important for a business owner to consider what may happen during the course of the life of the business and be prepared to face those situations when they arise. In case of retirement, a situation in which the owner has control on, he should give himself enough preparation time to put the business affairs in order.
Selling the Business, may also involve the sale of the Real Estate, if not used to facilitate the sale of the business. If you are growing your business you may need to acquire more Real Estate. If growth is by acquisition, you need businesses to acquire. My office can handle Real Estate transactions as well as the sale/purchase of the business. Contact me for a private and confidential meeting and see how I may help you achieve your objectives.