Why Do Business Owners Choose to Sell?
Whether their business exit strategy involves selling to a competitor, family member, or to private party, most business owners eventually want a change of lifestyle and financial security. The change of lifestyle is often sought due to the relentless pressure of time and stress imposed upon many business owners. The change of financial fortune is often sought due to the business owner’s desire to provide for their own retirement and to bequeath a legacy of financial freedom to their loved ones. Most commonly, business owners sell their business because of a pending retirement, burnout from working the business, or a desire to realize financial freedom for themselves or their family.
Many Business Owners Sell Due to Pending Retirement
The average retirement ages for both men and women have risen in recent years. In 2021, the average retirement age for men was 65 and for women was 62. This is higher than the average retirement age in 1992 of 62 for men and 59 for women. Also, college-educated people retire at a later age than high-school educated people. Lengthening life expectancies, and as importantly, better healthcare have contributed to the rising average retirement age.
Buyers of Businesses Understand that Sellers Retire
As Rocky Balboa once said, “Time takes everybody out. Time’s undefeated.” Eventually, every business owner must step away from their business. Although other options exist such as allowing a family member or employee to take over, most business owners will have to sell their business upon their retirement (or close their business). Buyers of businesses understand the need for a seller to retire, and typically give sellers who are retiring the benefit of the doubt when it comes to inspecting and even valuing the business
Sellers Who Are Retiring Often Have Very Valuable Businesses
Savvy buyers of business understand that sellers who are retiring are generally not selling because of any negative reason associated with the business that may not be readily apparent. Moreover, savvy buyers of business understand that sellers who are retiring have often built up a great business over a period of many years, and often have created a tremendous amount of goodwill by virtue of their longstanding customers and brand. The best businesses are built by truly dedicated business owners who have labored relentlessly over many years to create a competitive advantage in the marketplace which often makes their business more valuable.
Sellers Who Are Retiring May Have ‘Key Person’ Risk
‘Key person’ risk is the phenomenon of placing knowledge, skills, and key relationships of a business in the hands of one individual. When the ‘key person’ is the owner of the business who is selling the business, then that creates risk for the buyer after the sale. The buyer is afraid that the owner’s knowledge, skill, and key relationships may not be replaceable. It is therefore always suggested that a business owner who is thinking of retiring and selling their business first take steps to reduce their company’s ‘key person’ risk. This may be accomplished through making the business more owner-absentee by reducing the owner’s involvement and day to day management of the business.
Owner ‘Burn Out’ A Common Reason for Business Sales
It is usually not a good sign for a business owner if they dread going to work every day. Business owners who have an inordinate amount of stress and even despair from owning and operating their business suffer from ‘burn out.’ The burn out may result from frustration with employees (including the lack of employees), frustration with customers, or frustration with the lack of profits from running the business. If the business owner is faced with long hours and no vacations – with no commensurate level of profits- then burn out may be real problem.
‘Burn Out’ Not Viewed by Buyers As Good Reason to Sell
When buyers inquire about the reason as to why the owner is selling their business, it is always important to be honest and truthful. If the seller is selling due to burn out, then it is best to explain to the buyer why the seller has burn out. Often, the real reason for owner burn out is because the business lacks capable managers or staff that can alleviate the day to day responsibilities for the owner. This is a problem that usually may be addressed by the buyer of the business after the sale. As long as the business itself is sound with no hidden defect, then the valuation should not suffer so long as the buyer is shown a credible path forward whereby they may avoid their own burn out in the future.
Financial Freedom A Compelling Reason to Sell A Business
Many business owners who are too young for retirement and still enjoy going to work every day still choose to sell their business. These business owners simply want financial freedom for themselves or for their family by ‘cashing out’ their business interests. Selling a valuable business allows the business owner to quickly accrue a large amount of capital that typically incorporates several years worth of profits from the business. Additionally, they are also given freedom from the responsibilities of owning and managing a business. The freedom of having more time to do as they please along with the freedom of not worrying about the present and future prospects of their business is often a compelling reason to sell.
The three most common reasons for why people their business are pending retirement, avoiding owner ‘burn out’, and desiring financial freedom. No matter the reason, preparations for the sale should include reducing the owner’s level of involvement with the business, as well as having a business model in place that allows the buyer of the business to avoid owner ‘burn out.’
Give Martin at Five Star Business Brokers of Palm Beach County a call today at 561-827-1181 for a FREE evaluation of your business.