I teach a boot camp class each month for our local Small Business Development Center (SBDC). There is portion of this course that looks at the three ways to become a business owner. These ways include: buying a business, buying a franchise, and starting from scratch.
As I discuss the option of buying an existing business, I often hear someone in the audience say, “Aren’t you just buying someone else’s failing business when you buy an existing business?” While some owners may be trying to pawn off their failing business, these businesses can be weeded out with proper due diligence. The number one reason owners sell their business is boredom or burnout.
To counter the notion that all businesses for sale are dogs, I’d like to share a few of the other popular reasons business owners elect to sell their business.
Lack of Operating/Growth Capital Lack of operating or growth capital is a very common reason the founder chooses to sell a product-based or lifestyle business.
If you ever watch ABC’s Shark Tank, you will see many great ideas that can’t seem to break through due to a lack of risk capital on the part of the founder. Sometimes they have invested all of their savings to get a working prototype and no longer have the means or marketing expertise to get the company going. For the product to reach the light of day, the business needs fresh ideas and fresh capital.
Sometimes start-up founders realize their shortcomings and may simply be looking to add a partner or investor with complementary business skills and talents. Remember, most companies have more than a single owner so you don’t have to be the founder or sole owner to be a business owner.
Borrowing Capacity When it comes to debt financing, the small business owner is almost always the guarantor of any loan. The financial obligation to the company as a guarantor of a loan can often impact a person’s personal borrowing capacity such as when they are buying a new home or car.
Moreover, being a personal guarantor on business loans can be a heavy burden for many people. They can reach a threshold and decide to sell a business to eliminate their personal guarantees.
Age Of course age can be a factor, especially if the business requires a high degree of physical labor. Many years ago we had a custom hot tub designed and built by a local hot tub company. We continued to use the services of this company from time to time to fix leaks and replace failing parts. One day the owner said to me that he was going to sell the business because his body just could not take the rigors of working in the freezing cold. He also could no longer crawl into tight places under and around the tubs to repair leaks without experiencing pain which leads to the next reason owners sell.
Health Similar to age, another reason for selling a business is that the owner or a close family member may be experiencing health-related issues. Running the business is just too big a demand on their time if a close family member is dealing with a long-term illness like cancer.
Economic Diversity Business owners are often all financially in when it comes to their business. As the economy undulates, it favors different industries. Without a degree of income diversification, dips in economic cycles can spell doom for some owners. They do not have other sources of income to weather bad economic spells. Therefore, some owners will start a business and then cash out. Smart business owners will use the funds to perhaps start another endeavor, but hold back some in reserve for a rainy day. They may even invest in other businesses or industries to achieve a level of diversification.
For example, I had a residential real estate development business in the early to mid 2000’s The housing boom was in full swing and I was making good money. However it was concentrating too much of my net worth in one industry, residential real estate. I sold several of my model homes and rolled over the profits into a few key commercial income properties with long term leases. I then used the reserves to start an oil and gas business to achieve a level of income diversification. Oil prices soared to $120 per barrel while the income from the commercial property business remained relatively flat during the housing bubble collapse. The income diversity providing me the ability to weather the 2008 financial crisis that would have been disastrous for me had I stayed concentrated in residential real estate.
Fund Buy Out The last reason why business owners elect to sell their business is to fund a buy out. Sometimes a partner dies or gets divorced and the owner needs to sell the business to fund a settlement. Below is a video by TBD. In this video, a business broker responds to the question, “Why do sellers choose to sell?”
Do you know the real reason the business owner is selling his business?
