The decision to sell, or not to sell your business is a difficult one. There are many questions that need to be answered before an informed decision can be made. Is selling your best alternative? Will one of the kids want to take over the business? Timing is everything. Is now the right time? You do not have to sell or decide right now. You are quite busy so maybe you will look into it after. . .
Facing the issue of succession or continuation of one’s business is very much akin to addressing the need for life insurance. Neither subject is addressed with much enthusiasm by the average person. The prudent address the inevitable and prepare. Although only one eventuality exists for us as individuals, three exist for our business: Transfer to family, sell to outsider, or close down.
As with the purchase of life insurance, the decision to sell or plan a viable business’ succession can be continually postponed. Unfortunately, when a business must be sold it usually is too late. Few people are willing to buy a business that has to be sold. Of the hundreds of business transfers we have facilitated, less than a handful could be classified as sales for “desperate sellers.”
How have other business owners addressed the continuation of their business? Actually very little is known or documented regarding the succession of private and family businesses. The information available usually pertains to very large companies. Data regarding smaller business transfers and succession is generally not available.
What are business owners’ expectations regarding succession or the continuation of their businesses?
Massachusetts Mutual Insurance Company sponsored a telephone survey of 614 owners of family businesses grossing two million or more in annual revenues. The survey, conducted by the Gallop Organization and designed by Mathew Greenwald & Associates was completed in September 1994. Although the majority of private companies are considerably smaller than the sample (the companies had an average of 50 employees) the opinions of those surveyed should be representative of most business owners.
Questions related to succession expectations revealed: 65% plan to pass the business on to family members or other relatives, 24% do not plan to pass to family members, and 11% are undecided. Only 7% plan to sell or liquidate and 1% plan to pass the business to someone outside the family. Seventy-five percent do not have a written succession plan.
MassMutual reports that their survey is the largest of its kind ever undertaken and, since the report’s release it has been hailed as “the most comprehensive piece of information on family business ever produced.”
What really happens?
Franchisors are perhaps the best source of information on many issues relating to small business operations as they are intimately and contractually involved in the franchisees’ affairs. The franchisor is therefore an excellent source of information on what happens when a franchisee decides to “move on.” Do their franchisees go in and out of business happily?
Data compiled by Quick Printing (a magazine for commercial print shops and copy shops) may provide insight as to what is actually occurring, not only with franchised print shops, but also private and family businesses in general.
More than 5,000 print shops were represented in the survey. Of that number 302 closed their doors and 93 sold. Three businesses closed for every one that sold! Of the 395 franchisees that “moved on” (eight percent of the total) 76.5% went out of business whereas only 23.5% transferred to someone else.
John H. Brown, author of “How to Run Your Business so you can Leave it in Style” illustrates the conflict between business owners’ expectations for the continuation of their businesses, and the reality of what actually happens.
Expectations Vs Reality
Expectations Reality
Transferred to family 50% 15%
Sold to employees 30% 5%
Sold to outsiders 10% 10%
Sold to competitors 10% 10%
100% 40%
From an address to the International Business Brokers Association
The above data substantiates that reality is in direct opposition to the expectations of the MassMutual survey participants. Although the overwhelming majority of business owners wish for their businesses to continue, most businesses will simply close down.
Small business is continually credited with providing most new jobs, more than half of our gross domestic product, and perhaps 65% of all wages. Small business is the backbone of the US economy. A mortality rate of 75% among this most important group is a national tragedy.
Why Don’t Businesses Business Owners Sell?
The largest single reason that most businesses are not sold or transferred seems to be that the owners never made the decision to do so. If you do not make the decision to sell or select a successor, outside forces will eventually combine to determine the ultimate fate of your business. In defense of those who have not been able to come to a decision regarding business succession, we offer the following:
1. Business owners know they are missing important information in connection with selling.
2. To take action without a full understanding of “the rules of the road” would be foolhardy.
Most Businesses can be Sold
Our experience, gained in assisting more than 2,000 business owners with succession decisions and business transfers, indicates that essentially every business can be sold if:
1. Ownership fully understands the unique environment in which businesses are sold,
and therefore avoids the costly mistakes of employing traditional sales methods to sell their business.
2. Ownership recognizes the natural cycle of business ownership
(a time to grow and a time to go) and makes a timely decision and preparations to sell.
3. Those involved in the decision understand that the motivations to sell are personal and not purely financial.
4. The company is properly prepared for sale before marketing efforts begin.
5. The “right buyer” and the optimum price are identified before going to market.
A timely decision to sell, coupled with proper preparation and a comprehensive understanding of the unique rules and selling environment, is required for a business to transfer successfully.
Obtain Necessary Information
“I am considering the sale of my business” is the initial phrase we hear most often from business owners. Very few will tell us they have decided to sell. This is understandable as information is required before an informed decision can be made. Those that do proclaim to have decided to sell, generally have waited too long, and have nothing left to sell. Life insurance agents are not enthusiastic when someone calls out of the blue to buy life insurance. Ninety-nine times in one hundred that person has just left his doctor’s office with the bad news. You cannot buy insurance on a burning building. You cannot sell a business for an optimum price when you are compelled to sell. You can, of course, always liquidate or give the enterprise away. Is that what you would choose to do?