Top Management Story

Writen by Gregory R. Caruso

Make Sure You Understand Your Motivation for Selling

Are you thinking about selling your business?

This simple one-question quiz will help you to better understand your motivations behind this thought. A better understanding of your underlying motivations will help you make the right decision.

Select the answer closest to your actual reason for thinking about selling your business.

A. "I'm selling my business because of the money I will make on the sale". B. "I'm just tired and it's not fun anymore." C. "I have too many irons in the fire and can't keep up". D. "I'm ready to retire from owning my business".

A. "I'm selling my business because of the money I will make on the sale".

This is rarely a good answer if it is the primary answer. Most small businesses sell for 1 to 3 times yearly cash flow after adding back all owner salary, benefits, fringes, interest and amortization/ depreciation.

Larger mid-sized businesses generally sell for to 3 to 7 times cash flow after deducting for the cost of executive management. While this sum can be significant, it is usually only a few times what you will make this year.

Continuing on with the business will usually make you more money in the long run. On the other hand if you have an offer in hand from a public company at 20 times earnings, take it.

B. "I'm just tired and it's not fun anymore."

This question requires careful digging into the reasons for the thought. If you are really ready to get out of the business, then it is a good reason. If the real reason is that you are just tired under the current conditions and as soon as things improve you will get excited again, think long and hard.

Often during the sales process your broker, intermediary, or other advisor will provide coaching to improve obvious defects in the business to make it more salable. Sometimes measurable improvements occur for the business. Suddenly the owner doesn't really want to sell now that things are moving again.

This is a bad situation for everyone. If what you need is coaching to get out of a rut, hire a coach; don't sell your business. But, if you are really mentally done, sell the business before you completely run it into the ground.

C. "I have too many irons in the fire and can't keep up".

This is a valid reason to sell a business. It is a somewhat common occurrence for multi-location operators who either buy one too many sites or just end up with one or two sites that are too far away to manage.

Often the constant attention you must diverte to an under-performing site will lower earnings of the whole chain. Just remember when pricing the underperforming site for sale that if your not selling much in terms of profits or revenues your not going to get much in terms of price. An old adage that applies here is that the first loss is the cheapest loss. In this instance be prepared to take your loss and move on.

Another variation is the entrepreneur who has a new venture that is overtaking the older established business. Time constraints, management abilities, and variations in potential down stream financial returns may make it desirable to sell the older business. This can free up resources allowing better overall financial returns.

D. "I'm ready to retire from owning my business".

This is the king of reasons to sell. Just make sure its true. Selling a business often means walking away from it completely. Retiring sellers often want to think that they will be invited guests indefinitely.

Usually once the nuances of the business are understood the new owner will want to take the reins and run the business his way. At settlement you will sign an enforceable non-compete that legally and ethically obligates you to leave your old client base behind.

Another frequent issue is that the retiring owner has run the business "just to meet my needs" the last several years. In those instances the lower performance is what the business sale price is going to be based on. If you as a retiring owner want the full price based on what the business could really do - generate those results yourself and sell the business when the numbers are strong.

In general buyers are the least suspicious about dealing with retiring sellers. If the retiring owner has run the business well up to the end they can often get a small premium on their price.

The Bottom Line

There are thousands of variants to these four reasons to sell your business. Each variation comes down to the same underlying thought process-are you selling because of short term issues you will overcome or are you selling because it is time for you to get out? No one can answer this question for you but your future success and happiness may depend upon getting you it right.

If business is slow in your industry but you are hanging on, and you like the business as much as another career, then don't sell. Get the marketing, accounting, coaching or other help to get out of your rut and make it to the good times.

If you are completely burnt out, it really is time to retire, or you have much better things on the horizon then sell the business while it is still performing well in order to maximize your sales price.

Gregory R. Caruso is an expert at helping business owners plan and execute the sale of their businesses. Greg is an inactive CPA, attorney, and business owner with 20 years experience. He can be reached at www.successfulexits.com.