Why would someone sell a business?

​

​

 

     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

 

    It’s a common misconception that when an owner of a company decides to sell, there must be a negative reason. There must be something wrong with it, there must be some financial trouble, it’s about to go under, there must be something they know that we don’t. These speculations couldn’t be further from the truth. The reality is there are a variety of reasons a founder would sell their company. These reasons create an opportunity for entrepreneurs, private equity, and those seeking to work for themselves to take ownership of established and time-tested companies that have an operational track record. Some businesses that are in financial trouble do come up for sale from time to time, but they are priced accordingly. With the guidance of a qualified business intermediary “business broker”, this type of business is easily spotted during financial analysis. These distressed businesses do however create opportunities for the right entrepreneurs to purchase them at appropriate multiples, and turn them around for huge profits. Typically, we do not see many distressed businesses come to market, and subsequently we advise only seasoned business buyers to consider those opportunities.

 

 

   So, what are the reasons we typically see business owners decide to sell? Every business ever created has a life cycle that starts with an idea but one day reaches an end. This end is met in one of three ways, Liquidation of the business, bankruptcy of the business, or a transfer of business interest. Many times, we encounter business owners that are in a position that only can be solved through liquidation or bankruptcy. Regretfully, they waited too long to contact us which leaves little options in way of selling their business at a premium, but through business consultation we’ve seen these same businesses turned around to a point of profitability. To learn more about our Business Consultation, please click HERE.

​

​

​

​

​

​

​

​

​

​

​

​

​

​

 

 

   

 

 

 

 

    Many business owners build a business with the intention of handing it down to their children, but our data has shown the same entrepreneurial gene that sparks a creative drive in a business owner sparks the same drive in their children. Their children find themselves desiring to build their own company one day and rarely desire to take over the family business. This leaves many business owners unsure of what to do with their businesses once they are ready to retire. The must choose one of the three pathways to stepping away from their business. Liquidation, bankruptcy, or a transfer of ownership. The sale of a business or part of a business is considered a transfer of ownership interest. This occurs in many forms, from a sale of assets, stock sale, mergers or acquisition, divestitures, earnout, stock buy out, partial sale to private equity, or taking on a partner. We’ve represented companies valued at $20,000 all the way up to $20MM plus. From main street to Wall Street the economy is spurred on by the transfer of business ownership.

 

 

    The life cycle of a business can be represented by a bell curve. A business starts with an idea, gains traction as founders apply action to their ideas, grows as innovation and capital investments are made. The growth phase of this curve can continue exponentially as creativity, leadership, innovation, and capital investment are applied in key areas required to meet client and market demands. We see this as companies are taken public after being privately held by the founders. What we don’t often see in the public eye is the growth that takes place once a founder takes on new leadership in the form of private equity or venture capital, due to the private nature of this sector. In smaller companies we see this take place as an owner reaches their own limitations and decides to sell part or all of their company. Sometimes an owner is ready to take on a partner or be acquired by a larger company to add innovation and new leadership to their company’s offerings. Sometimes an owner is ready to start to enjoy the fruits of their labor and not bear the entire burden of running a company solely by themselves. All of these transaction types allow for the transfer of an owner’s interest in a business and continue the growth curve on indefinitely.

 

 

 

 

 

 

   

 

 

 

 

 

 

 

 

 

    As stated above, the growth phase of this curve can continue exponentially as creativity, leadership, innovation, and capital investment are applied in key areas required to meet client and market demands. Once a plateau occurs in the growth curve, it’s a signal that one of the above key functions are not being executed well and client/market needs are not being met. Dave Ramsey says, “the people that brought a company to $5MM in revenue usually aren’t the same people that can take the same company to $20MM in revenue. You need different people in the room.” This adage creates opportunities for business owners to seek the leadership of private equity groups and creative entrepreneurs alike to breath new creative ideas into their companies and watch them continue to grow. A business owner that has invested their blood, sweat, and tears to grow a company is thrilled to see their company continue to grown under new leadership and new ownership. They have a vested interest to see the success of the business and the new owner. Sometimes deal structures like earnouts are created to help a previous owner stay connected to the success of the business and the new owner to have the vested interest and wisdom of the previous owner to guide the business down the path of profitability.

  

  

     Another reason some owners decide to sell their companies is a change in lifestyle. After many years, long hours and much sacrifice many business owners are ready to cash in on the fruits of their labor and enjoy themselves. Maybe purse a passion project or buy a bar on the beach. Building a business takes a lot of time and effort, and the profitability of the business is directly tied to the owner’s efforts. This highlights the main reason people choose to buy a business rather than build one from scratch. For those looking to grow their existing business or step into business ownership for the first time the benefits of purchasing an existing business far outweigh the cost of acquisition. A 1-3 X multiple is a small price to pay for a 5, 10, or 20-year track record. Take into consideration the effort it takes to create an organization structure, value proposition, define a customer base, create a marketing plan, engage with customers, and build a team to execute it all, it’s hard to pass up the opportunity to acquire an existing operation verse start one from scratch.

 

 

 

  

 

 

 

 

 

 

 

 

 

 

   

 

 

 

 

 

 

 

    The transfer of business ownership results in greater ROI and higher profit margins than typically passive real estate investing. A company’s value is derived from a valuation based on a multiple of seller discretionary earnings “SDE” or a multiple of EBITDA. Future earnings, growth, and discounted cash flow are taken into account for larger companies as well. These valuation methods are designed to give buyers an opportunity to see the true cash flow of a business no matter how advanced the tax strategies that are in place. The recasting of financials unwinds the business’s cash flow and tax strategy of the business allowing potential buyers the opportunity to compare “apples to apples” the profitability and growth of each business opportunity being pursued.

 

 

  Here are some factors to consider when purchasing a business.

1. Decide what you’re looking for.

​

· What industry? What industries do you have experience in and what industries do you have interest in? What are your hobbies or interest outside of work?

​

· What location? Where do you want to be located? What areas are growing? Are you willing to relocate?

​

· Lifestyle. What type of lifestyle interest you? Are you interested in a job involving lots of travel? Are you open to working odd hours, or would you rather stick to a traditional nine-to-five? As the owner of a business, the buck stops with you -- so think twice before choosing the kind of hands-on business that might involve emergency phone calls at 3 a.m.

​

· What size company? Do you want to own a small family business, or a large, bustling enterprise? Buying a larger business could mean bigger profits, but will likely also involve a higher purchase price and more stress in the transition.

​

2. Researching available businesses. BuyaFloridaBusiness.com complies all of the latest Business listing in the state of Florida. Click HERE to start your search today.

​

3. Working with a business broker. The job of a business broker or business intermediary is to bring a buyer and a seller in the sale of a business. The Broker receives his commission from the sale of a business which is paid by the seller and works to represent the transaction as a transaction broker. This gives the broker the opportunity to work with both the buyer and seller to reach a common goal of smooth transfer of ownership interest and continued success of the company. Jason Godwin is a professional business intermediary with Florida Business Exchange and the owner of BuyaFloridaBusiness.com. For any questions on purchasing a business, contact him today HERE.

​

4. Completing due diligence. Once the target business has been located, and an offer accepted by the seller the due diligence phase starts. This is the opportunity for the buyer to look under the hood of the business and see the financials in more detail. This is where the experiences of a professional business broker shines, during financial analysis of the business.

​

5. Acquire the necessary funding. Once you’ve settled on a purchase price for the business and know how much funding you need, you have a few options for sources of financing:

​

• Seller financing: This is where the seller allows you to make payments over time to purchase the business, usually for the purchase price plus interest. If your seller is open to this option, it can be the best financial choice for all involved.

• Angel investors or venture capital: In this model, you would be partnering with someone else to purchase the business -- they are the financial investor, and you are the on-the-ground operator. If the business succeeds, this will cost you significantly in profits. But if it fails, you won’t have to worry about paying debts on a business that isn’t making money.

• SBA/Business loan: Alternatively, you could take out a term loan to purchase the business through a traditional bank or an online alternative lender. The good news here is that lenders are often more open to loans for purchasing existing businesses with a known revenue history. Even so, your personal financials will play a big role in your ability to qualify.

 

6. The Closing Table. You’ve chosen a business, negotiated the terms, and secured the funding to make a purchase. All that is left to do is draft the agreement and sign on the dotted line at the closing table. Don’t leave any ambiguities that could cause trouble at closing or even after the sale has gone through.

Choosing to buy an existing business is a valuable entrepreneurial feat that will impact your life, your community and the lives of your employees for years. With the right connection and a lot of hard work on the transition, you may be the perfect person to turn a good business model into great future for all involved.