Letters of Intent - Why Sellers Sell

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Reasons Why Sellers Sell

There are as many reasons for a business owner to sell their company as their are businesses and owners. That is to say no two reasons are identical. However, by zooming out, some themes do emerge.

I’ve grouped the reasons that I’ve seen the most in practice into two categories: opportunistic and necessary. The former relates to situations where a seller is usually looking to maximize their near-term financial outcome. The latter is usually driven by an underlying catalyst that makes the decision to sell more obligatory.

Opportunistic

• Avoiding harder times ahead - Sellers benefit from having more information about their market than most buyers. If they sense a coming and persistent decline in their business or industry, some may choose to offload this risk onto a new buyer to try to sell at a local maximum price before headwinds become more broadly evident. Or, if a seller is close, but otherwise not quite ready to cash out, but fears a recession, change in credit markets, or other factors that may suppress buyers’ valuations of firms like theirs, they may seek an accelerated exit to reduce the risk of having to stick around and operate their business longer than they’d ideally like to under other circumstances.

• Maximizing value after a peak year - Post-COVID, this one is showing up a lot. Many companies have either benefitted from the pandemic itself (think testing and diagnostic companies) or are rebounding from the past few years as they capture pent-up demand (some parts of travel). Other instances of having an anomalous peak year might be the signing of a large one-time customer or a single-event shift in cost structure that gives a ‘pop’ to profitability, among other causes. In any event, owners who believe these recent gains in performance are not going to last might look to take chips off the table at a high water mark in their business’ history.

• Receiving an offer too good to refuse - This one is pretty obvious. If someone comes along and offers a value that far exceeds the amount an owner believes their business is worth, most owners will give this some consideration, and some will, in fact, become sellers. This tends to happen in really hot, up-and-coming industries, in situations where the company has few competitors (strategic value), or where PE or other groups of buyers have taken an interest and are actively consolidating a market.

• Choosing to pursue other interests or businesses - This and the next cause are a bit different from the previous ones in that the objective of price maximization may not be quite as heavily weighted as in the other cases. I’m thinking here mostly of non-retirement age founders or owners (retirees is covered in the next section) who have reached a point where the business they are selling no longer holds or deserves as much of their focus and time as it did in prior years. Maybe they’ve started another company, found a hobby, or discovered a philanthropic interest that is capturing more of their attention and they’d prefer to channel more of their time and resources into that endeavor or organization. Obviously, they’d like to sell, but they don’t have to and can be pretty discriminating about to whom they sell and on what terms and at what price.

• Acknowledgment of a lack of skills or capital to allow the business and team to reach their full potential - This requires a high degree of self-awareness on the part of the owner. Recognizing that you aren’t the right leader or lack some critical resource to seize important opportunities and grow your business can be a difficult conclusion to reach. For those that do, they may choose to retain some ownership or sell entirely for the greater cause of furthering the mission of the company they built and to allow employees to continue to have access to new professional development opportunities.

Necessary

The next four don’t require explanation, so I’ll just present them in list form for your consideration.

• Being ready to retire, especially when there is no identified successor

• Experiencing a serious health event or family emergency

• Feeling completely burned out

• Being in the midst of an irreconcilable partner dispute

In each of these cases, an owner may no longer literally or emotionally feel like there is any other path to move forward in their lives that doesn’t involve selling their company and unburdening themselves from the daily responsibilities that obligation carries.

An Alternative to Selling

At least three of the reasons above (pursuing other interests, retiring, and being burned out) could be dealt with in a way that would not involve parting with ownership in a legacy business, though a surprisingly small number of sellers I talk with choose to pursue it. What is that option? Hiring from outside or promoting an internal team member into the CEO position. This works better for companies that are profitable enough to afford a new salary and still have additional profits that can flow through to the owners, but when feasible, there are clear advantages. These include retaining the equity value and income stream (and often health care and other benefits) for an extended span of time, which almost guarantees a better financial outcome if the business is held for even just a few more years, an ability to still participate in the business at some desired level, and the option of mentoring a new leader. So why don’t more owners choose to do this? Here are some of the reasons I receive when I probe on this topic:

Reasons Why Owners Prefer a Sale to Hiring a New Leader

• Misfire on prior senior hires - Some owners have actually tried to hire a new leader - but failed. By not succeeding, they become convinced that they aren’t capable of bringing on the right person for the role or that no one else will operate the business as well as they can. Perhaps their expectations are too high or they sabotage the hire because they aren’t really committed to their success, but more often they (like we all do sometimes) have made a mistake and hired the wrong person for the job. Once this belief sets in, it is very hard to dislodge and they start to find or invent more reasons why they can’t be successful and, ultimately, cease their efforts.

• Lack of competence in finding and attracting a high quality successor - This is similar to the misfire reason described above, except that in this case the owner hasn’t even tried to make the hire. The limiting belief they often share is that they aren’t capable of identifying or selling a capable candidate to join and lead their small company. They might have never made a senior-level hire or mistakenly believe that talented executives wouldn’t be interested in becoming involved with a company of their size. Whatever the thinking, these sellers are too intimidated by the process to start the recruiting process.

• Too emotionally attached to the business (All In or All Out) - Many of the companies I come across are founder-led and the owners have deep personal connections to their businesses, their employees, and customers. For these owners, they cannot separate themselves from their business and the thought of owning it, but not running it is impossible. They’re either ‘all in or all out’ and have to run and own the company or sell all of it and walk away; there’s no middle ground in their mind.

When owners express these thoughts, they are credible and the emotions and obstacles are real and often practically insurmountable. The only solution for them is to bring on an experienced financial partner or an investor willing to buy the entire company, even if it isn’t the most economically rational thing to do. Business decisions are often well-served by analysis and logic, but business is also about people. And people are complex and make decisions that are still aligned with their agendas and viewpoints, but don’t necessarily always make sense to outside observers.

Whether owners seize opportunistic moments to sell, face circumstances that necessitate a transition, or choose the path of hiring a new CEO and retaining control, I respect their choices and appreciate that we’re all navigating the complexities of business with as much empathy and understanding as we can.