Deciding to launch your own business is one of the most important decisions that you can make. Starting a successful business requires identifying a gap in the existing market and capitalizing on the opportunity. But, even more so than knowing when to start, a business owner needs to know when the time has come to sell their business and step away.
This article will examine 8 common reasons why business owners might decide to sell their business. But before delving into these reasons, it’s crucial to understand why would a company want to be acquired and why do companies merge.
1. Financial Gain
One of the most common reasons for an entrepreneur to sell their business is for financial gain.
Some entrepreneurs have a driving passion to change the world for the better. However, many entrepreneurs are mainly interested in the life-changing money that can result from starting their own company. Once the business has reached a point where it’s generating positive cash flow, the owner might look to sell it and cash out with a lump sum.
Valuing Your Business
For the business owner, selling their business can be a quick way to cash in on the value of what they’ve built. In the short term, selling the business is usually much more profitable than continuing to run it. This is because businesses are typically “valued” at a higher price point than the amount of cash flow they generate on an annual basis.
Learn how the business can be valued with our introductory guide:
A business’s valuation is just an approximation and is constantly changing. The true value of your business will also be dependent on many other factors. If you want to learn more about how to accurately value your business, please feel free to reach out to the Acquinox team.
If you’re considering selling your company, it’s crucial to understand the process and strategies involved. Selling a business involves various steps such as valuation, finding potential buyers, negotiations, and legal aspects. Learn more about how to sell your business effectively to maximize your financial gains and ensure a smooth transition.
2. Market Timing & Conditions
An entrepreneur could also be enticed to sell their business if the market conditions are perfect to achieve maximum financial gain. This aspect is crucial in understanding the business sale process and how to sell a business effectively.
For example, these three scenarios have presented entrepreneurs with the perfect opportunity to sell:
- The 2001 Dot Com Bubble: During the late 1990s, there was a frenzy of investment in internet-related startups. Many of these companies went public during this time, capitalizing on the enormous investor appetite for tech stocks
- Covid-Induced Tech Boom: The COVID-19 pandemic accelerated digital transformation and led to a surge in tech-related businesses. Some of these companies, such as those in e-commerce, remote work, and healthcare technology, found the market conditions ripe for going public as demand for their services skyrocketed.
- SPAC-Frenzy: In 2022, Special Purpose Acquisition Companies – also known as “Blank Check” companies – emerged as a new way for private companies to go public. These entities raised capital with the sole purpose of acquiring private companies and taking them public. Many private companies saw this as an attractive alternative to traditional IPOs and rushed to merge with an SPAC. At their peak, SPACs represented 70% of all IPOs and helped companies raise $95 billion in total.
Under normal economic conditions, a business owner might have no intention of selling. But, if the market conditions change to favor their business, then they might be inclined to change their mind.
3. Seeking a Partner
Just like on the popular TV show Shark Tank, many business owners will sell a portion of their business in exchange for an equity stake in their business. In these types of deals, the business owner is usually interested in two things:
- Forming strategic partnerships: Bringing on an investor who has valuable connections or knowledge. Doing so could create synergy potential, both in terms of revenue and costs, which could translate into maximizing revenue or reduction of key costs to achieve higher profitability.
- Receiving a much-needed investment: Bringing on an investor who can provide financial resources that could be used for initiatives like product development, investments in new technology, or launching products in new markets. The investor could also provide funds to acquire add-on companies to enhance market positioning, gain international reach, diversify products or services, acquire new customers, and more.
Additionally, when considering how to sell a small business, seeking a partner can be a strategic move. Partnering with the right investor can not only provide financial support but also expertise and resources to help navigate the selling process effectively.
4. Succession Planning
Even the world’s most successful businesses reach a point where the founder must step away. In fact, it’s fairly rare for a company to go public with the same person who founded it still at the helm. According to Schroders, only 30% of global companies listed were led by their founders.
Founders often choose to step away from their company because the skills required to run a startup are very different from the skills required to run a company that has dozens, hundreds, or even thousands of employees.
With this in mind, the business owner will step away from their company strategically so that they can ensure that the business falls into the right hands, especially when considering the sell company or embarking on the company sale process.
5. Lifestyle Changes
While it’s very financially and personally rewarding, running a business is also a highly demanding role. Even running a fairly small corporation requires lots of difficult decision-making and the stress of influencing the lives of all of your employees.
At some point, the founder might simply want to step away from the pressures of running their business to pursue a different lifestyle. This “different lifestyle” could include things like pursuing another passion/venture, accepting a high-level role with another company, or simply spending more time with friends and family.
In this sense, it’s similar to an athlete choosing to retire so that they can focus on coaching, broadcasting, or relaxing.
6. New Opportunities
Speaking of approaching a new venture, a business owner might also sell their business so that they can pursue a new opportunity entirely. In this sense, it’s really no different than an employee quitting their job to accept an entirely new position with a new company.
Selling your business can provide you with a fresh start – and typically a windfall of cash – that can be used as seed capital for your next venture. The entrepreneur could use the funds from their sale to start a new business, start angel investing, start a nonprofit, diversify into different assets, and more.
7. Regulatory Changes
If new laws are enacted that have a significant impact on a business then the owner might be incentivized to sell.
In some cases, a new regulatory change might provide a massive tailwind to a business. But, instead of chasing this opportunity themselves, the business owner might simply take the opportunity to seek a larger valuation for their business. On the flip side, a new law could also be a headwind for a company which might still encourage the business owner to sell.
8. Competitive Pressures
Finally, a business owner might sell due to competitive pressures. These pressures often prompt strategic decisions about the company’s future direction and market positioning. In such scenarios, understanding why do companies buy other companies becomes crucial.
In some cases, a major competitive threat can force a business owner to pivot the business or diversify into different product categories. If this happens, the idea of putting extra work into the business can be a driving motivation to sell. This decision involves careful consideration of various factors including how do I value my business amidst changing market dynamics and competitive landscape.
For example, let’s say that you start a software company that sells an innovative product. During the first two years, the business enjoys incredible success. But, in the third year, the company’s core product is copied by Google. Instead of going head-to-head with the world’s biggest internet company, you might try to capitalize on the business’ initial success by selling it instead.
Understanding the sell side of the transaction is equally important. Knowing how to position your business, showcase its strengths, and negotiate effectively can make a significant difference in the outcome.
We hope that you’ve found this article valuable when it comes to learning some of the reasons why business owners choose to sell. If you are interested in selling your business, please reach out to the Acquinox team to learn more.
