One of the first questions that a buyer will ask when a business is for sale is “Why are they selling?”
When the business is strong, and the vendors seem young and healthy, some naiive buyers will express some suspicion about why it is for sale. There seems to be a misconception out there that a successful business owner will only ever buy, grow and accumulate businesses. That when they decide to sell one, it could only be if they were retiring, sick or if there was something wrong with the business that the buyer cannot see yet…
This is an incredibly narrow and pessimistic view of what it is to be a successful business owner.
Successful businesspeople sell their businesses for many reasons that have nothing to do with the underlying prospects of the actual business being sold. Any smart business owner should consider selling any business when they realise that one of the following has occurred:
1. If they realise that their time and/or resources is better spent elsewhere.
One of the things that makes a person or company successful in business is that they seem to understand the inherent opportunity cost of their time and resources.
Every business owner has limited/finite time and resources and needs to decide where to allocate them. Not every business opportunity operates at the same ratio of time/effort to profit/return. Some businesses are more time hungry and require more effort than others.
When a successful business owner is selling a business, it is often because they could allocate those resources to another business that they already own (that needs more attention or investment), to another business that they wish to buy or to lifestyle/ family pursuits.
This doesn’t mean that the business they are selling is not good. The business may be an excellent business, but just isn’t a good fit for their circumstances and their business holdings/portfolio at the time.
2. If they realise that the business is worth more to someone else than it is to them.
a. A dental practice turning over $700k with 0% profit can be a good job for a dentist owner-operator (taking home 40% of the $700k (less lab)), but not a good business for a third-party owner (who needs to pay a dentist 40% of the $700k (less lab)).
That is to say, some practices are worth far more to an owner operator to run and work in, than to a third-party business owner.
b. Some businesses are full of opportunity that the current owner simply lacks the skill, time or inclination to realise. To give an extreme example, a dental practice doing $1M turnover that is referring out all crown and bridgework or implants is worth far more to another owner who can offer these treatments, than to its current one.
3. If they realise that they have extended beyond their ceiling of complexity
Business owners that become successful often feel they now can replicate the formula with a second location or business, then a third. Many (most) will grow until they hit their ceiling of complexity.
For many, their ceiling of complexity will be their ability and capacity to delegate, manage, hire, inspire and keep good staff. Their initial business did well because it had 100% of the owner’s attention and time. Once they reach their ceiling of complexity, each additional business they own:
- has diminishing returns because the owner’s attention and time will be diluted and there is no one onsite with an ownership mentality AND/OR
- Starts to diminish:
- the performance of the original business/es
- Their relationships with their family and friends
- Their mental health
If someone is good at juggling and you hand them one more ball than they are used to, they don’t just drop the extra ball…they start to drop all of them. If a business owner in this category cannot raise their ceiling of complexity, they are better off selling the additional business, consolidating their holdings to a point that they are comfortable with.
4. If they realise that their business would be worth less in the future under their ownership.
A business owner’s final years are usually less productive than the years that preceded them. These business owners tend to prioritise lifestyle (as they should) and work less hours per week, weeks per year (and dentist business owners offer lower clinical range).
If a business owner starts to see a decline in the turnover and profit of a business that they own, and don’t have a plan or inclination to reinvest time and energy into it, it would make sense to sell now, before the value decreases further. If they want to continue to work, they should do so as an employee/contractor in their old business.
5. If they only bought the business to build up and sell.
There are three main ways to make money out of business ownership:
- Salary. For a dentist practice owner, this means their 40% commission.
- Profit. What the business makes after all expenses are paid, including the principal’s salary.
- Capital growth realisation. Buy low, build up and sell. A good example of this business model is with property developers.
Some practice owners fall into this third category. They have no interest in buying a business and running it for the rest of their careers. They want to buy something cheap, with potential, fix it up, show buyers that the growth is sustainable and sell it for a profit.
For more articles like this one please click below: