Imagine a business on fire – not literally, but figuratively. Its customers are loyal, revenue is climbing, and the future seems bright. But then, a surprise announcement: it’s been sold. You scratch your head, wondering why someone would sell at such a pivotal time. Selling a successful business might seem counterintuitive, but transacting on the upswing can often be the optimal time.
Beyond the Bottom Line: Expected and Unexpected Reasons to Sell
Let’s explore the complex and compelling reasons why even the most successful entrepreneurs choose to exit their booming ventures.
Reason 1: Retirement Estate Planning
For many owners, much of their personal wealth is likely tied up in their #1 asset – their business. After years of tireless dedication to their companies, owners are ready to transition into their retirement years while maintaining their desired standard of living. Selling the business while it is thriving to a third party like a strategic buyer or private equity group allows owners to achieve maximum valuation in order to secure their financial future and leave a legacy for their loved ones.
Reason 2: Transfer to the Next Generation
Many businesses have been around for generations. Transitioning ownership to the next generation is a natural progression, ensuring the company’s legacy lives on. Business owners can sell a portion of the business to a private equity group or other outside party if they are looking for a partner for the next generation. This transaction is called recapitalization. This type of sale can allow the owner’s family to maintain a significant ownership position in the business while also creating a significant liquidity event for the owner who is ready to retire.
Reason 3: Partially Cash Out, but Stay on Board
When business is booming, some owners decide to take some chips off the table for diversification purposes but retain some ownership and remain involved in the day-to-day operations of the business. By selling just a portion of their company to a private equity group or family office, owners can diversify their wealth portfolio while staying connected to their creation. Merging with a competitor or selling a percentage to a larger company creates a win-win situation for both parties, unlocking new growth potential and market reach.
Reason 4: Sell to Advance Another Opportunity
Many business owners are serial entrepreneurs with a restless spirit and drive for innovation. While they may be happy in their current business, another idea might be brewing that they are excited to pursue. Selling their high-performing business can free up capital and energy for owners to pursue new ventures and challenges.
Reason 5: Maximize Profits During a Favorable M&A Market
Similar to most financial markets like the stock market and housing market, the Mergers and Acquisitions (M&A) market can be cyclical. A savvy owner may choose to sell during a favorable period to maximize their return on investment. Businesses in “hot” industries can be highly desired by private equity buyers, creating a bidding war for owners with prosperous businesses.
Reason 6: Exit or Sell due to Life’s Curveballs
Unfortunately, there are circumstances that can lead to a business exit by necessity and not by choice. Situations such as death, disability, divorce, disagreement (among family or partners) and distress (health or financial) are 5 “D’s” that can lead to an unexpected business sale. It is essential for business owners to have a succession plan in place to immediately dictate the next steps for the ownership and operations of the business. No plans in place? Businesses that are without an estate plan and succession strategy will likely endure some chaos while the details are worked out.
From securing a comfortable retirement and maximizing value during a favorable market, to transitioning ownership to the next generation or pursuing a new entrepreneurial venture, the reasons for selling are highly personal to the business owner. These exits often demonstrate the foresight and planning of the business owner, who has built a valuable asset and is making a calculated decision for themselves, their company, and potentially their family’s future.
The Takeaway:
The sale of a thriving business reflects a strategic decision by the owner. Motivations may range from retirement estate planning and generational transfer to capitalizing on a favorable market or pursuing new ventures. These well-timed exits demonstrate the owner’s foresight in maximizing value and ensuring the company’s future success.